RBC Capital Markets, LLC v. Jervis

IN THE SUPREME COURT OF THE STATE OF DELAWARE

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RBC CAPITAL MARKETS, LLC, § No. 140, 2015

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Defendant Below, §

Appellant/Cross-Appellee, § Court Below:

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v. § Court of Chancery of the

§ State of Delaware

JOANNA JERVIS, §

§ C.A. No. 6350-VCL

Plaintiff Below, §

Appellee/Cross-Appellant. §

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Submitted: September 30, 2015

Decided: November 30, 2015

Before HOLLAND, VALIHURA, VAUGHN, and SEITZ, Justices; and JOHNSTON,

Judge, constituting the Court en Banc.

Upon appeal from the Court of Chancery. AFFIRMED.

Myron T. Steele, Esquire, and T. Brad Davey, Esquire, Potter Anderson & Corroon LLP,

Wilmington, Delaware; Of Counsel: Alan J. Stone, Esquire (Argued), Daniel M. Perry,

Esquire, Benjamin E. Sedrish, Esquire, Milbank, Tweed, Hadley & McCloy LLP, New

York, New York, for Appellant/Cross-Appellee RBC Capital Markets, LLC.

Joel Friedlander, Esquire (Argued), and Jeffrey M. Gorris, Esquire, Friedlander & Gorris,

P.A., Wilmington, Delaware; Of Counsel: Randall J. Baron, Esquire, and David Knotts,

Esquire, Robbins Geller Rudman & Dowd LLP, San Diego, California, for

Appellee/Cross-Appellant Joanna Jervis.

Jack B. Jacobs, Esquire, Sidley Austin LLP, Wilmington, Delaware; Of Counsel: A.

Robert Pietrzak, Esquire, Andrew W. Stern, Esquire, Daniel A. McLaughlin, Esquire, and

Cameron Moxley, Esquire, Sidley Austin LLP, New York, New York; John K. Hughes,

Esquire, Sidley Austin LLP, Washington, D.C., Amicus Curiae for Securities Industry

and Financial Markets Association.



Sitting by designation pursuant to Del. Const. art. IV, § 12.

Raymond J. DiCamillo, Esquire, Richards, Layton & Finger, P.A., Wilmington,

Delaware; Of Counsel: Mark A. Kirsch, Esquire, Jonathan C. Dickey, Esquire, Gabrielle

Levin, Esquire, and Jonathan D. Fortney, Esquire, Gibson, Dunn & Crutcher LLP, New

York, New York; John F. Olson, Esquire, Gibson, Dunn & Crutcher LLP, Washington,

D.C., Amicus Curiae for National Association of Corporate Directors.

VALIHURA, Justice:

I. INTRODUCTION

Pending before this Court is an appeal and cross-appeal arising out of a final

judgment of the Court of Chancery finding that RBC Capital Markets, LLC (“RBC” or

“Appellant”) aided and abetted breaches of fiduciary duty by former directors of

Rural/Metro Corporation (“Rural” or the “Company”) in connection with the sale of the

Company to an affiliate of Warburg Pincus LLC (“Warburg”), a private equity firm. The

Court of Chancery issued four opinions which form the basis of this appeal.

First, on March 7, 2014, the Court of Chancery issued a post-trial decision and

held RBC liable to a class of Rural stockholders (the “Class”) for aiding and abetting

breaches of fiduciary duty by Rural’s board of directors (the “Liability Opinion” or

“Rural I”).1

Second, on October 10, 2014, the Court of Chancery issued a decision setting the

amount of RBC’s liability at $75,798,550.33, constituting 83% of the $91,323,554.61 in

total damages that the Class suffered, which represented the difference between the value

the Company’s stockholders received in the merger and Rural’s going concern value

(“Rural II”).2 The trial court awarded pre- and post-judgment interest at the legal rate

from June 30, 2011 until the date of payment.

Third, on December 17, 2013, after Rural filed a suggestion of bankruptcy, the

Court of Chancery granted Joanna Jervis’s (“Jervis” or “Lead Plaintiff”) motion to bar

1

In re Rural Metro Corp. S’holders Litig., 88 A.3d 54 (Del. Ch. 2014) [hereinafter, “Rural I, 88

A.3d at __”].

2

In re Rural/Metro Corp. S’holders Litig., 102 A.3d 205 (Del. Ch. 2014) [hereinafter, “Rural II,

102 A.3d at __”].

1

consideration of a declaration from Stephen Farber, who joined the Company as its Chief

Financial Officer on June 25, 2013, two years after the transaction, in which he presented

reasons for the entity’s subsequent financial turmoil (the “Farber Declaration”).

Finally, Lead Plaintiff filed a fee application with the Court of Chancery, seeking

to shift attorneys’ fees for RBC’s alleged misrepresentations in its pre-trial filings. The

Court of Chancery, on February 12, 2015, denied the application. On February 19, 2015,

the Court of Chancery entered its Final Order and Judgment.

RBC raises six issues on appeal, namely, (1) whether the trial court erred by

holding that the board of directors breached its duty of care under the enhanced scrutiny

standard enunciated in Revlon; (2) whether the trial court erred by holding that the board

of directors violated its fiduciary duty of disclosure by making material misstatements

and omissions in Rural’s proxy statement, dated May 26, 2011; (3) whether the trial court

erred by finding that RBC aided and abetted breaches of fiduciary duty by the board of

directors; (4) whether the trial court erred by finding that the board of directors’ conduct

proximately caused damages; (5) whether the trial court erred in applying the Delaware

Uniform Contribution Among Tortfeasors Act (“DUCATA”); and (6) whether the trial

court erred in calculating damages.3

On her cross-appeal, Jervis argues that the Court of Chancery erred in holding that

fee shifting requires a finding of “glaring egregiousness.”

3

The Securities Industry and Financial Markets Association (“SIFMA”) and National

Association of Corporate Directors (“NACD”) filed amici curiae briefs in support of reversal.

2

In this decision, we AFFIRM the principal legal holdings of the Court of

Chancery.

II. FACTS

As a preliminary observation, we note that, at oral argument before this Court,

counsel for RBC emphasized that RBC “intentionally made appellate arguments that do

not require this Court to review findings of fact.” Although RBC has chosen to avoid any

direct and specific challenge to the facts as found by the trial court, this Court,

nevertheless, has examined the appellate record in its entirety.

A. The Key Players

Rural is a Delaware corporation headquartered in Scottsdale, Arizona. Founded in

1948, the Company is a leading national provider of ambulance and private fire

protection services that serves more than 400 communities across 22 states. Its

ambulance business offers emergency and non-emergency transports under contracts with

government organizations, hospitals, nursing homes, and other healthcare entities.

Rural’s shares traded on NASDAQ from July 1993 until the merger closed on June 30,

2011. Upon closing, each publicly held share of Rural common stock was converted into

the right to receive $17.25 in cash.

Before the merger, the board of directors had seven members: Christopher S.

Shackelton, Eugene I. Davis, Earl P. Holland, Henry G. Walker, Robert E. Wilson,

Conrad A. Conrad, and Michael P. DiMino (the “Board”). Of the Board’s seven

members, the trial court, in Rural I, determined that Wilson, Davis, Holland, Conrad,

3

Walker, and Shackelton were “facially, independent, disinterested, outside directors.”

DiMino was Rural’s President and CEO. Wilson did not vote on the merger.

Shackelton, Davis, and Walker comprised the special committee (the “Special

Committee” or “Committee”). Shackelton was its Chair. The trial court found that

Shackelton played the most significant role, and that Davis and Walker generally

deferred to Shackelton.

On April 8, 2013, all parties filed pre-trial opening briefs and all defendants were

headed for trial. On April 25, 2013, plaintiffs advised the Court of Chancery of an

agreement in principle to settle with Moelis for a payment of $5 million to the Class. On

April 29, 2013, the individual defendants advised the Court of Chancery that they had

also reached an agreement in principle to settle for a contemplated payment of $6.6

million to the Class. Thus, the case proceeded to trial solely against RBC.

B. The Company’s Business Plan

In May 2010, the Board hired Michael P. DiMino as the Company’s new President

and CEO and gave him a mandate to grow the Company. To carry out his mandate,

DiMino developed new growth strategies. As discussed in the Company’s public filings,

Rural planned to:

Increase Revenue Through Strategic Growth. Flexibility in our capital

structure allows us to actively pursue acquisitions of ambulance transport

businesses and to consolidate business in the fragmented ambulance

transport market. We will pursue acquisitions that are accretive to our

profitability, leverage our strengths and complement our existing national

footprint.

Increase Revenue Through Organic Growth. We believe our proven track

record of high-quality patient care, meeting and exceeding contract

4

expectations and progressive public/private partnering arrangements aimed

at assisting communities to achieve their cost structure goals, creates

opportunities for us to increase revenue by winning competitive bids for

emergency ambulance services. Additionally, we will increase non-

emergency ambulance service revenue within existing and contiguous

service areas by leveraging our community name recognition and record of

service excellence to gain preferred provider status with local hospital

systems, nursing homes and other healthcare facilities.

Increase Revenue Through New Market Non-Emergency Contracts. We

believe we can increase revenue by entering new markets where we do not

have an emergency transportation presence. We will enter new markets

through preferred provider agreements with local and regional hospitals and

healthcare systems for non-emergency general transportation services. We

believe our name recognition and service excellence in our existing markets

will allow us to gain entrance into new markets to provide non-emergency

services to larger scale customers.

The trial court concluded that “[t]he evidence at trial demonstrated that Rural’s

growth strategy was reasonable and achievable.”4 However, at trial, DiMino also

testified about the risks facing the Company in late 2010 and early 2011, which included

potential difficulties integrating acquisitions and changes in the sources of payments for

the Company’s services. The Company’s public filings detailed these risks.

RBC was hired by the Special Committee as Rural’s primary financial advisor in

connection with the Company’s decision to explore strategic alternatives in late 2010.

Anthony Munoz, a Managing Director at RBC, was Rural’s lead banker. Marc Daniel,

RBC’s lead M & A banker, participated in the Rural sale process alongside Munoz.

Moelis & Company LLC (“Moelis”) was brought on as Rural’s secondary financial

advisor. Richard D. Harding, a Managing Director, was Rural’s contact at Moelis.

4

Rural I, 88 A.3d at 107.

5

Before being engaged by the Company, RBC had, according to the Board minutes,

a “significant (and satisfactory) track record with the Company in relation to debt

financing transactions and other advisory matters.” In addition to maintaining a

relationship with Rural, RBC also had an “active dialogue” with Warburg, the

Company’s eventual acquirer, which extended beyond Warburg’s participation in the

Rural sale process. Sean Carney, a partner at Warburg, was the point person for

Warburg’s Rural acquisition team.

The Special Committee was first formed in August 2010, after RBC advanced the

idea of Rural acquiring American Medical Response, Inc. (“AMR”), its primary national

competitor in the ambulance business. AMR was a subsidiary of Emergency Medical

Services Corporation (“EMS”). As a response to RBC’s approach, the Board formed the

Special Committee with the authority to oversee the process of formulating Rural’s

acquisition strategy concerning AMR.

In October of 2010, the Board re-formed the Special Committee to respond to an

approach by Irving Place Capital and Macquarie Capital (jointly, the “Consortium”),

which, together, expressed a preliminary interest in acquiring the Company. The Board

regarded the Consortium’s expressed interest in acquiring Rural for $10.50 to $11.50 per

share as being too low to justify engagement. Shackelton intimated that the price offered

by the private equity firms “was plainly insufficient in relation to the Company’s stand-

alone prospects.” Nonetheless, later that month, on October 27, 2010, the Board charged

the Special Committee with the “authority to oversee the process of reviewing the

Company’s alternatives, making recommendations to the Board, determining a course of

6

action and, if it deems appropriate, negotiations and related interactions with the

[C]onsortium . . . .”5 The two private equity firms suggested that they would be willing

to raise their interest level to $15.00 per share, but discussions with the Consortium

concluded when Irving Place Capital withdrew after Rural affirmed that it was not for

sale at the revised price point.

During the liability phase of the proceedings, the plaintiffs did not contend that

any director breached his duty of loyalty, but they did argue, and the trial court found,

that Shackelton, Davis, and DiMino each had personal circumstances that inclined them

towards a near-term sale.6 For example, Davis, in the Fall of 2010, served on a dozen

public company boards, which brought him into conflict with an Institutional Shareholder

Services Inc. (“ISS”) policy against “over-boarded” directors.7 As President and CEO of

PIRINATE Consulting Group LLC, Davis often joined boards as a hedge fund nominee

or as an outside director acceptable to stockholder activists. Beginning in 2004, Davis

served as chairman of the board for Atlas Air Worldwide Holdings (“Atlas Air”). He was

particularly concerned about avoiding a recommendation against his re-election at Atlas

Air. At his deposition, Davis testified that ISS had “uniformly recommended against

[him]” due to the fact that he routinely sat on the boards of more than six public

5

According to the minutes, “[t]he committee was instructed to update the Board regarding its

activities on a regular basis, and to return to the Board to provide its recommendations and/or to

obtain further instructions and authority when the need therefor is apparent.”

6

In Rural II, the trial court determined that Shackelton and DiMino’s unique reasons to favor a

near-term transaction presented a conflict, and that, but for the settlement, they would have

shared a common liability with RBC to the Class.

7

Davis testified that “[o]ne of ISS’s rules is they will not support a candidate for a board who

sits on the boards of more than six public companies.”

7

companies. Through counsel for Atlas Air, Davis met with ISS and agreed with them on

a process where over time he would reduce his number of board positions to six and,

pending the completion of that process, ISS would continue to give him a positive

recommendation.8 Davis and ISS set a deadline date of April 2011 for the completion of

the director’s board seat reduction process. Davis testified that “Rural/Metro had already

decided to put itself up for sale, so I put Rural/Metro on the list of companies I was going

to leave.”9

Like Davis, Shackelton had personal reasons for pushing a near-term sale.

Shackelton was a managing partner of Coliseum Capital Management, LLC

(“Coliseum”), a hedge fund he co-founded in 2006. Coliseum generates returns by taking

concentrated positions in small capitalization companies, obtaining influence, and then

facilitating an exit within approximately three to five years. Over the course of 2007,

Coliseum began acquiring shares of Rural. At trial, Shackelton suggested that, in so

doing, the fund managers believed they were investing in an undervalued company and

over the course of a longer-term horizon they would be able to recognize that value. By

October of 2010, Coliseum had amassed an equity stake in Rural of approximately 12%,

at a cost basis of “substantially less than $10 a share.” By early 2011, Coliseum’s

position in the Company’s securities equated to more than 20% of the investment firm’s

8

The Court of Chancery further found that “[a] sale of Rural would reduce [Davis’s] number of

board seats, while letting him exit on a professional high note.” Rural I, 88 A.3d at 65. The trial

court observed that a Rural business combination before his directorship deadline would enable

Davis to realize $200,000 in the Company’s equity, which would vest upon a change of control

and which he would otherwise have to leave on the table if Rural did not change hands prior to

April 2011. Id.

9

B615.

8

portfolio. The Court of Chancery, therefore, concluded that Shackelton saw an M & A

event as the next logical step for Coliseum’s involvement with Rural.

DiMino was appointed Rural’s President and CEO effective June 2010. He also

assumed a seat on Rural’s Board. DiMino, upon arrival at Rural, formulated a three part

strategy to grow the Company: (i) acquire local and regional providers in the highly

fragmented ambulance transport industry, (ii) enter new markets by securing contracts

with hospitals for non-emergency, general transportation services, and (iii) secure new

government contracts through the request-for-proposal process. The trial court

determined that Shackelton’s interest in an M & A event was also a reaction to DiMino’s

business plan, and that DiMino’s growth plan conflicted with Coliseum’s investment

strategy.

Moreover, the trial court concluded that DiMino was a late convert to the idea of a

sale. During most of 2010, he favored keeping Rural independent, but changed his mind

after his six month performance review, when he received negative feedback from

Shackelton and Davis due to his response to the Company’s exploratory discussions with

private equity firms. In a November 1, 2010 email to Conrad and Walker, DiMino stated

that his desire was to “wait to sell th[e] business until after” it had realized on certain of

its growth initiatives.10 He continued by noting that he had spoken with RBC and

Shackelton, who told him that “now is the time to sell.” Shackelton also told DiMino that

“[h]e want[ed] to do this in the next 3 to 6 months and have [DiMino] prepare the

10

B21. To that end, an internal RBC memorandum posited: “Under new leadership, the

Company will also pursue tuck-in acquisitions that are both strategic and accretive to EBITDA.”

B269.

9

business for this process.” DiMino told Walker and Conrad: “Obviously this changes

my direction and perspective. Instead of running the business for the mid to long term[,]”

DiMino would have to “make decisions for the [] short term.” DiMino also stated in the

November 1, 2010 email that, in his opinion, he “would wait to sell th[e] business . . .

[until s]ometime after June of next year.” He concluded by suggesting that he had “a lot

already invested personally” at Rural. Analysts, such as J.P. Morgan, recognized that

there was “[p]otential for meaningful . . . stock price appreciation . . . as [the] growth plan

is executed on/realized.”

In notes to himself, dated December, 1, 2010, Shackelton documented feedback

from Macquarie Capital that suggested that DiMino was “an impediment to a sale.”

Shackelton wrote that he “[b]elieve[d that DiMino] was looking for buyers that would be

more favorable to him,” and that there was a “[u]niversal recognition [at Rural] that

[DiMino didn’t] want to sell the [C]ompany for personal reasons.” In fact, because he

surmised that DiMino did not stand “to gain from the transaction” with the Consortium,

Shackelton determined that DiMino “introduced enough concerns regarding the risks of

buying the business to scare off buyers[.]”

DiMino’s perspective changed following his performance review. Davis and

Shackelton’s collective input was particularly negative. The trial court found that, from

that point on, DiMino supported a sale and deferred to Shackelton.

Davis reasoned that DiMino shifted from being “unalterably opposed” to a sale to

being a willing participant, due to the fact that the pool of potential acquirers was flooded

with financial buyers. In deposition testimony, Davis stated:

10

[T]he light bulb finally went over his head that they’d probably ask him to

run it, and given the way that his relationship with the Board -- our Board

had deteriorated, I think at some point, he came to the conclusion he would

be better off with a different Board, and a new owner would bring a

different Board, on top of which he was going to prematurely cash out on

the equity that he had received less than a year earlier. And probably if he

was given the job back, would get more equity. It was a very good deal for

him. He finally figured it out.

RBC fails to mount any serious challenge to the trial court’s factual findings with

respect to the personal interests of Shackelton, Davis, and DiMino as being clearly

erroneous, and our independent review of the record confirms that such findings are

supported by the evidence.

C. The Special Committee and Engagement of RBC

In early December 2010, EMS was rumored to be in play. The trial court found

that Munoz and his RBC colleagues realized that a private equity firm that acquired EMS

might decide to buy Rural rather than sell AMR. It found that RBC recognized that if

Rural engaged in a sale process led by RBC, then RBC could use its position as sell-side

advisor to secure buy-side roles with the private equity firms bidding for EMS. Further,

the trial court concluded that RBC believed that with the Rural angle, it could get on all

of the EMS bidders’ financing trees. The record evidence supports these findings. In a

December 18, 2010 email, Moti Rubin urged his RBC colleagues to get “up to speed with

all of ems (amr and emcare) as who knows what we end up financing[.]” He wrote:

As you know we are working all angles re EMS. Rural is an important

angle and most sponsors want to use that angle in some way – either

splitting up EMS and having [Rural] buy AMR . . . or [the] sponsor buying

the [sic] ems and [Rural] and combining the 2, or other combos. Clearly

this is the most important fee event opportunity we have in healthcare and

[there is a] reasonable probability this will happen in some shape or form.

11

we are not treeing up yet but I want to make sure that we are getting ready

to move swiftly on this.

Four days later, Rubin told Munoz that RBC “should be able to get on all [EMS bidder

financing] trees given the [Rural] angle.”11

The Rural Board met on December 8, 2010. The trial court found that the Board

re-activated the Special Committee as a response to the meeting, but, in so doing, it did

not authorize the Special Committee to pursue a sale. The evidence reflects that, at the

meeting, Shackelton discussed the Company’s long-term strategic choices and outlined

three alternatives: “(1) continue to pursue the Company’s current standalone business

plan (including taking advantage of opportunities to purchase smaller competitors); (2)

pursue a sale of the Company; or (3) pursue a transaction that would seek to take

advantage of the synergies available via some form of business combination transaction

involving the Company and its principal competitor.” Shackelton, at the time, suggested

that he had not “formulated a preference among the three” strategic alternatives. When

Shackelton’s presentation concluded, the Board unanimously agreed that the Company

should promptly proceed to engage an appropriate strategic advisory team and pursue an

in-depth analysis of the alternatives discussed during the meeting.

Also at the December 8 meeting, the Board “unanimously agreed that the scope of

authority for the [S]pecial [C]ommittee created at the Board’s meeting of October 27,

2010 would be revised to include this project, and authorized and directed the

[C]ommittee to proceed to interview advisers.” Shackelton maintained his position as

11

In a December 8, 2010 email to Munoz, Shackelton wrote: “At the right price, we can be part

of the ‘angle[.]’”

12

Chair of the Special Committee. At the same meeting, Shackelton took over as Chairman

of the Board from Conrad.

The trial court found that Shackelton told RBC that he was open to reaching out to

private equity firms about partnering on an acquisition of EMS. Also, on December 13,

Shackelton advised his fellow directors that he was setting up a meeting to interview

potential financial advisors.

On December 14, EMS publicly announced that it was exploring strategic

alternatives. Its stock price spiked 19%. Rural’s stock also traded up. Shackelton, on

December 20, emailed the Board with an update: “The EMS process is moving more

quickly than we’d anticipated. Over the past 5 days, we have been contacted by nine

private equity firms that are either interested in partnering to buy EMS or turning the

tables and acquiring [Rural].” Shackelton suggested that he was “increasingly focused on

engaging an advisor.” To expedite the hiring process, Shackelton arranged for a call with

the other members of the Special Committee, reasoning: “Since the purpose of this call

will not be to evaluate and select a strategic direction, I do not believe we need the entire

board to block off four hours for the banker presentations. Our only objective will be to

select an advisor.”

On December 23, 2010, the Special Committee interviewed Houlihan Lokey,

Moelis, and RBC. The trial court found that, unlike the other firms, RBC devoted the

bulk of its presentation to a sale and recommended coordinating the effort with the EMS

process. RBC stated that it “recognize[d] that selling the Company today is opportunistic

and that the optimal time to sell is when the interests of the seller and external market

13

factors are aligned to best maximize value. We believe that time is now[.]” RBC favored

an immediate sale because the M & A environment for healthcare was “strong,” Rural

possessed “compelling assets” that would sell at premiums, and such quality assets were

otherwise not readily available to interested buyers that played in the healthcare market.

The trial court found, and the evidence indicates, that RBC only identified financial

sponsors as potential bidders and suggested that an advantage of selling Rural at that

period in time was that the “[d]ebt markets remain[ed] open.”

By contrast, the trial court found that Moelis approached the engagement from a

different standpoint. Moelis’s presentation stressed its growing M & A franchise and the

bulk of its presentation examined a potential combination with AMR. Moelis placed less

emphasis on a sale, and noted that it would not seek to finance any of the bidders.

RBC hoped to offer staple financing to the potential buyers. The minutes of

December 23 meeting reflect that the Special Committee considered the “‘pros and cons’

of retaining an investment banker as a financial advisor if that advisor would also seek to

provide so-called ‘staple financing.’” The Committee’s legal counsel advised that, “if the

Committee were to select RBC, the Committee would need to be especially active and

vigilant in assuring the integrity of the progress [sic], and that it should consider

appointing a second firm which would not be in a position to provide staple financing,

but that would be very close to the process to assure both the fact and appearance of an

appropriate and robust auction process.”

The trial court found that RBC did not disclose that it planned to use its

engagement as Rural’s advisor to capture financing work from the bidders for EMS, and

14

the minutes do not reflect such a disclosure. Munoz’s trial testimony supports this

finding:

Q. . . . Now, when going through these -- these reasons about why to

initiate a sale process, did you say that RBC would use the initiation of a

Rural/Metro sale process to help RBC get a role financing EMS?

A. In our materials we included a discussion about, one, the financing

of potential [sic] sale of Rural; and, two, then we also discussed the

possibility of financing both the merger of both companies.

Q. But did you advise the special committee, in writing or orally, that

RBC would be using the initiation of a Rural/Metro sale process to help

RBC get a role financing EMS?

A. No.

Q. At any time did you say to anybody at Rural/Metro that RBC was

using its relationship with Rural/Metro as an angle to get a role financing

the EMS transaction?

A. We told both the management team and Mr. Shackelton that we

were working with select parties on the potential financing of EMS.

Q. Did you say that RBC was using its relationship with Rural/Metro as

an angle to get a role financing the EMS acquisition?

A. No.

On December 26, 2010, Shackelton sent an email update to the Board, noting that

“the Special Committee selected RBC (as primary) and Moelis (as secondary)

[advisors].” The trial court found that the Board only authorized the Special Committee

to retain an advisor to analyze the range of strategic alternatives available and to make a

recommendation to the Board. The email from Shackelton to the Board states:

“Partner/sale process: We are continuing to refine a target list of PE firms (10-15). We

have reached out informally to almost all of them over the past two weeks. Given that

15

most of the firms are currently working through the EMS sale process, it is not yet clear

where their individual preferences will end up.”12

D. The Rural Auction Process

The trial court found that the decision to initiate a sale process in December 2010

was unreasonable at the outset because the Board did not make the decision to launch a

sale process, nor did it authorize the Special Committee to start one. The trial court

further concluded that the initiation of the sale process in December 2010 was

unreasonable because RBC did not disclose that proceeding in parallel with the EMS

process served RBC’s interest in gaining a role on the financing trees of bidders for EMS.

It found that RBC designed a process that favored its own interest in gaining financing

work from bidders for EMS. RBC’s sale process design, as the trial court observed,

prioritized the EMS participants so they would include RBC in their financing trees.

RBC did not disclose the disadvantages of its proposed schedule. The trial court also

12

A543. The email continues:

At this stage, we have prioritized two firms that appear to have the highest level

of interest in Rural and the financial capacity to execute a transaction:

- Apax: As of today, we have a NDA in place and this evening we connected for

our first management introduction call

- KKR: We are expected to have a NDA in place by tomorrow morning. We are

planning to have a management introduction call tomorrow

*Assuming these firms move forward, we will be sharing our projections with

them over the coming week

Looking forward to the week of January 3rd, we are considering the benefits of

more formally reaching out to 6-12 other PE in order to gauge their level of

interest in Rural (either as a partner in an AMR acquisition or an acquisition

target). With this in mind, we will be working with RBC/Moelis over the next

week to refine our financial model and presentation materials.

16

found that the Board failed to oversee the Special Committee, failed to become informed

about strategic alternatives and about potential conflicts of interests faced by the advisors,

and approved the merger without adequate information, including the value of not

engaging in any transaction.13

The evidence supports these findings and reflects that RBC viewed Rural as an

“angle” to obtain EMS work. RBC scheduled first round bids for late January 2011

because that tracked with the EMS process and Rural’s ability “to act as an ‘angle.’”

RBC hoped to generate up to $60.1 million in fees from the Rural and EMS deals. The

maximum financing fees of $55 million were more than ten times the advisory fee.

The record also indicates that there were identifiable benefits to initiating a sale

process in December 2010, as the trial court noted. By January 2011, Rural’s stock price

was up 143% since 2010 and trading at a 5-year high, the EBITDA multiples in the

emergency medical transport sector had expanded, financial sponsors were interested in

participating in the space, and the leverage finance markets were supporting equity

valuations in the industry.

Despite the potential advantages of running the sale process in early 2011, the trial

court found that Rural encountered readily foreseeable problems associated with trying to

induce financial buyers to engage in two parallel processes for targets that were direct

competitors. The challenges regarding protection of Rural’s confidential information and

coordinating schedules with EMS bidders were raised for the first time on February 6,

2011, at a meeting of the Special Committee. The trial court found that the Special

13

We similarly refer to claims involving the sale process as the “Sale Process Claim.”

17

Committee had not previously considered this complication. With respect to the issues

concerning the terms of standard confidentiality agreements, the Court of Chancery asked

Munoz at trial:

Q: . . . It seems to me that this type of information sharing issue, which

comes up whenever you do a process that involves potential competitors,

would have been something that you all would have anticipated when you

originally contemplated the spin/merge process when you were

recommending the two-track structure. Was it?

A: Yes.14

RBC was aware that the Rural confidentiality agreement contained a no-conflict

provision that prohibited recipients of Rural’s confidential information from sharing it

with individuals involved in the EMS process.15 The no-conflict provision provided:

“natural persons participating in the discussions with the recipient in connection with the

potential negotiated transaction have not been, are not, and will not be participating in a

potential financing of an acquisition or other similar transaction involving EMS or

AMR.”16 The confidentiality agreement then required the recipient to confirm in writing

that the no-conflict provision was satisfied.

14

A2145.

15

At trial, Munoz testified as follows:

Q. Now, moving back a couple months to January, for purposes of getting bidders to

accept staple financing from RBC, you suggested to the financial -- your financial

sponsor colleague, banker colleague, to remind their financial sponsors that the

confidentiality agreements they signed forbid them from sharing Rural/Metro

confidential information to [sic] other financing sources; right?

A. That is correct, yes.

A2097.

16

A2097-98.

18

RBC developed a two-track bidding process, with the first classification of buyers

constituted primarily of those participating in the EMS process and the second grouping

generally composed of “those that have dropped out of the EMS process and/or [those

that] have/should have interest in [Rural] as a standalone deal . . . .”17 During December

2010 and January 2011, with the Special Committee’s approval, RBC and Moelis

contacted 28 potentially interested parties. In late January 2011, RBC distributed a bid

instruction letter to the twenty-one private equity firms that signed confidentiality

agreements. The full Board had not met since December 8, 2010. The Special

Committee had not met since December 23. Six parties submitted indications of interest,

ranging between $14.50 and $19.00 per share. RBC and Moelis apprised the Special

Committee of the reasons parties dropped out of the auction process, including two who

could not justify a price above the stock’s trading value. Later, Munoz contacted

Shackelton, informing him as follows: “Fyi – Thoma Bravo out. Said they can’t get to

current stock price.”

In late December 2010 and early January 2011, participants in the process

provided negative feedback about its timing and design. As the auction developed,

Moelis’s concerns regarding transaction complexity were realized; Harding, the Rural

point person for Moelis, commented that a potential bidder for Rural, KKR, suggested it

“would be tough” to participate in “simultanous [sic] auctions.”18 Moreover, KKR told

Rural’s bankers that it “would be ideal” if the EMS deal and the Company’s deal were

17

A544.

18

B136.

19

“stagger[ed].” After speaking with Bain Capital Partners, LLC (“Bain”), Harding shared

with Shackelton and RBC that the private equity firm also thought that “lining up two

deals for public companies simultaneously is tough but staggered, even fairly closely,

could work[.]” Clayton, Dubilier & Rice (“CD & R”), a private equity firm, also urged

delaying the Rural process until the EMS sale was completed.

On January 24, 2011, DiMino met with a team from J.P. Morgan, which

recommended that Rural execute on its growth plan over the next year. J.P. Morgan saw

Rural poised at an “[i]nflection [p]oint” in which the Company was transitioning from

turnaround to early-stage growth story. J.P. Morgan’s presentation to Rural’s CEO

fundamentally challenged the central, “sell now” thesis of RBC.19 It hesitated to

recommend an immediate sale because “logical strategic buyers” at the time were

concentrating on change of control transactions of their own. J.P. Morgan also

recommended Rural continue to execute on its “growth plan,” as doing so would drive

further stock price appreciation. It advised DiMino that allowing the healthcare market to

play out, in the meantime, would enable Rural to attract greater interest from financial

sponsors and strategic buyers. In sum, it suggested that a Rural sale would likely be

better accomplished at a different point in time, in view of the fact that strategic bidders

were then “internally focused” and the Company had “significant growth to unlock.”

DiMino limited his distribution of the presentation to Shackelton and Munoz, noting: J.P.

Morgan “had some interesting comments regarding the AMR process and our potential

19

J.P. Morgan observed that, if Rural “execute[d] on [its] growth plan,” there would be

“significant interest to come,” particularly in light of the fact that strategic bidders were, at the

time, “focused internally[.]” B150.

20

attractiveness to private equity firms. I didn’t tell them we had launched our own go-

private process.”20

The Board did not schedule a meeting to review the indications of interest or

discuss next steps. The Special Committee met on February 6, 2011. RBC made a

presentation that did not include any valuation metrics. At the meeting, where Conrad,

DiMino, and Wilson were also present, RBC and Moelis reviewed the six indications of

interest received following the auction process. The minutes indicate that, after receiving

the confidential information memorandum, “14 firms declined to participate. In addition,

one private equity firm, [Bain], indicated that the level of its interest in pursuing the

transaction with [Rural] would depend on the results” of its participation in the EMS

process. A joint presentation by RBC and Moelis summarized the initial indications of

interest:

American Securities — $16.00—$17.00;

Ares Management — $14.50—$16.50;

CD & R — $15.50—$16.50;

Leonard, Green & Partners — $17.00—$19.00;

Kelso & Company — $14.75—$16.50; and

Warburg — $17.00.

RBC’s presentation to the Special Committee at the February 6 meeting was four pages

long, provided no opinion, preliminarily or otherwise, on the quality of the bids, and, as

the Court of Chancery observed, failed to include any valuation metrics.

20

B144.

21

The trial court concluded that, while the minutes reflect that Shackelton asked

Davis and Walker whether to include all six private equity firms in the next phase,

Shackelton and RBC already had agreed to make a data room available to all bidders

beginning the next day, February 7, and had scheduled meetings with all six firms to take

place between February 9 and 18. DiMino privately contacted RBC in search of

valuation metrics. According to the trial court, RBC gave DiMino a two-page analysis

showing that at prices of up to $18 per share, an LBO would generate five year internal

rates of return for a financial sponsor that exceeded 20%. On February 8, Munoz

provided DiMino with a deck regarding leveraged buyout returns, evidencing five year

internal rates of return over 20% for offers exceeding $15.50 per share.

The Special Committee met again on February 22, 2011. RBC made a limited

presentation, which included no valuation metrics and which was followed by a

discussion of CD & R’s potential participation in the Rural process. The Special

Committee identified CD & R, after it won the EMS sale, “as a competitor of the

Company, causing certain confidentiality and antitrust issues to be considerations[,]” if

the private equity firm participated in the Rural process.21 DiMino testified at trial that,

at this meeting, he was “very concerned” about confidentiality with respect to CD & R.

He continued by elaborating on that point as follows:

21

Additionally, during an executive session of the meeting, without RBC or Moelis present,

legal counsel discussed the Court of Chancery’s holding in the case of In re Del Monte Foods

Co. S’holders Litig., 25 A.3d 813 (Del. Ch. 2011). At trial, DiMino testified that he was aware

of legal counsel’s advice that, in light of RBC’s interest in stapled financing, the directors “be

actively involved in the process in order to assure that there is neither an actual problem with

regard to the conflict of interest, nor the appearance of a defective process as a result of this

conflict of interest . . . .” A2212.

22

Because if [CD & R] got to the full management presentation or they got to

get all the information that we would normally give in the management

presentation and in the data room, some of those things could be

counterproductive if they didn’t buy -- if they ultimately didn’t buy us.

They would have trade secrets or some of our secret sauce, if you will, that

we had developed.22

DiMino testified further that this concern about confidentiality was present when the

Company first launched the sale process.

The trial court found that, although RBC previously had recommended a near-term

sale process to capture the interest of the winner of the EMS auction, the Special

Committee now balked at having CD & R participate. The Special Committee set a bid

deadline of March 21 and decided not to solicit interest from strategic acquirers. As the

bid date approached, CD & R suggested to RBC that it could outbid other sponsors for

Rural because of synergies with AMR. CD & R asked for the bid deadline to be pushed

back to April, so that it could formulate its bid.

On March 15, 2011, the Board met to consider the Special Committee’s progress

for the first time since December 8, 2010.23 The minutes reflect that representatives of

RBC and Moelis made a presentation to the Board “regarding the ongoing exploration of

the potential sale of the Company” and reviewed the “next steps” in the “sale evaluation

process.” Daniel made the presentation to the Board on behalf of RBC. Akin to its

previous presentations, RBC failed to include valuation metrics and provided no opinion,

22

A2232.

23

The trial court found that the minutes prepared in connection with the March 15 meeting “have

the feel of a document drafted in anticipation of litigation, and the rose-colored description of the

sale process that appears in the minutes does not match up with what actually took place.” Rural

I, 88 A.3d at 72.

23

preliminarily or otherwise, on the quality of the bids during its March 15, 2011 sale

process update.

Further, the minutes of the March 15 meeting suggest that RBC and Moelis

“commented upon the detailed oversight provided by the Special Committee of

independent directors throughout the process, noting frequent formal and informal

communications involving the full committee or its chair (Mr. Shackelton).” RBC, at the

meeting, also remarked upon the “formal meetings of the Special Committee that were

held during the process.” Shackelton suggested that “the full Board had been updated

from time to time at key points in the process.”

The trial court found, however, that the description of the process in the minutes

was “false,” in that the record presented to it contained evidence of only two formal

meetings of the Special Committee: one on February 6, 2011 and one on February 22,

2011. According to the trial court, Davis was largely an absentee director and Walker

deferred to Shackelton, who drove the process. Again, RBC does not plainly argue that

these findings are clearly erroneous and, even if it did, we find no basis for such a

conclusion.

At the March 15 meeting of the Board, RBC and Moelis discussed the final bid

deadline of March 21, 2011. The trial court found that RBC had designed the sale

process ostensibly to give the winner of the EMS auction the opportunity to make a bid

for Rural that included synergies. It determined that neither the Board nor the Special

Committee considered the benefits that could inure to Rural’s advantage if the winner of

the EMS process then sought to acquire Rural, because Rural could seek to extract a

24

portion of the synergies from a combination of AMR and Rural in the form of a higher

price.

CD & R, the private equity firm that won the bidding process for EMS and one of

the Company’s six suitors, was a topic of discussion for the Rural directors on March 15.

CD & R had advised RBC and Moelis that it would be unable to complete its due

diligence and other review processes with respect to Rural until the completion of its

acquisition of EMS, and that any bid it might submit would be conditioned accordingly.

The minutes suggest that the Board discussed the following with respect to CD & R:

[T]he potential for a higher purchase price from CD&R relative to other

bidders due to the potential synergies that could be realized between [Rural]

and AMR under common ownership by CD&R; a possible delay in the

March 21 deadline to accommodate CD&R and the impact on the

enthusiasm of other potential bidders if the reason for the delay became

known; the risk to [Rural’s] sale process of waiting for CD&R in view of

the timing for the other potential bidders; the potential for dealing with

CD&R via a “go-shop,” “fiduciary out” linked to a reasonable break-up fee,

or other contractual provisions . . . .

On the advice of RBC, Moelis, and legal counsel, the Board “concluded it was in the best

interests of the Company to proceed with a bid deadline of March 21, and that CD&R

would be encouraged by the Company’s financial advisors to submit its best and final bid

at that time.” A March 15, 2011 RBC presentation to the Board reflects that CD & R

communicated that it would not participate further in the Rural sale “due to its

involvement in the EMS process[.]”

The trial court found that RBC’s faulty design prevented the emergence of the

type of competitive dynamic among multiple bidders that is necessary for reliable price

discovery. Because Warburg had withdrawn from the EMS process, it was able to pursue

25

Rural aggressively, thus giving Warburg an advantage over others who were still

involved in evaluating EMS. The trial court concluded that Warburg knew that its

competitors in the process lacked similar resources and that it did not need to incorporate

as much of its anticipated gains in its price to outbid the other firms. Carney referred to

the private equity firm’s challengers for the Rural acquisition as a “motley group because

the EMS process put so many of the larger firms on the sidelines.”24

In addition to the competitive design issues faced by prospective financial buyers,

the evidence indicates that strategic buyers were preoccupied. The March 15 minutes

state: “Generally speaking, it was noted that it was unlikely that any potential strategic

purchaser not affiliated with a private equity firm would have an interest in the ability

[sic] to enter into a transaction on terms acceptable to the Company.”25 J.P. Morgan’s

presentation to DiMino commented that “[t]he three other strategics are focused

internally now[.]”26 Thus, the competitive dynamic was inhibited by the fact that

potential strategic bidders for Rural were themselves tied up in change of control

transactions at the time the Company was exploring a sale. The Board decided to

proceed without reaching out to Falck A/S, a European company with an equity interest

in Rural and a potential strategic bidder. The Board also decided not to extend the bid

deadline.27

24

B251.

25

A616-17.

26

J.P. Morgan’s presentation suggested that EMS, AirMedical Group Holdings, and Air Methods

were potential strategic acquirers. B150.

27

After the meeting, RBC told the remaining bidders that the timeline would not be extended,

although Rural pushed the deadline out by 24 hours to March 22.

26

The Board then adopted a resolution which the trial court characterized as

“granting the Special Committee the authority that Shackelton and RBC had assumed for

themselves.”28 It states:

NOW THEREFORE, BE IT RESOLVED, the Board of Directors hereby

ratifies and restates its delegation to the Special Committee of the exclusive

power and authority to (i) determine whether a Potential Transaction is or

may be, at this time, in the best interests of the Company and its

stockholders, and report its recommendations to the full Board of Directors,

(ii) retain and work with outside advisors in a controlled and contained

process to seek from various financial institutions indications of interest

and possible transaction terms in respect of a Potential Transaction, (iii)

review and evaluate the terms and conditions of such indications of interest

and determine the advisability of advancing further in respect of such

proposals and/or whether other strategic alternatives in respect of the

Company should be explored, (iv) if it deems appropriate, solicit proposals

for a Potential Transaction that would be in the best interests of the

Company’s stockholders, (v) negotiate and finalize terms of any such

Potential Transaction and, and [sic] (vi) report its findings and

recommendations to the full Board of Directors[.]

E. RBC’s Efforts to Secure Staple Financing and Warburg’s Final Bid

Rural’s Engagement Letter with RBC and Moelis contains its most specific

disclosures with respect to RBC’s buy-side financing ambitions in Section 2, which is

entitled, “Certain Agreements of the Company.” Section 2.d) expressly provides that

“RBC shall have the sole and exclusive right to offer stapled financing to, and arrange

stapled financing for, any potential purchaser in a Sale Transaction, if the Board of

Directors or a special committee of the Board of Directors deems it desirable to offer

stapled financing to potential purchasers.”29 This language, however, does not capture

28

Rural I, 88 A.3d at 73.

29

A553. This provision of the Engagement Letter further provides:

27

2.d) Additionally, in connection with an AMR Acquisition Transaction or

Alternative AMR Acquisition Transaction, RBC shall have the right to participate

in the provision of any and all debt financings, on mutually acceptable terms, as

appropriate, required for the completion of such Transaction, and shall have the

opportunity to present credentials to the Board of Directors and senior

management of the Company with a view toward being appointed to have a lead

role in the underwriting, bookrunning, placing, managing or leading of various

elements of such financing, as appropriate.

Id. The Engagement Letter defines an “AMR Acquisition Transaction” as:

[A]ny merger, consolidation or other business combination or acquisition

transaction pursuant to which the Company is to acquire all or a majority of, or be

combined with, American Medical Response, Inc. (“AMR”), or all or a majority of

its business. For the avoidance of doubt, an AMR Acquisition Transaction shall

not include a Sale Transaction or an Alternative AMR Acquisition Transaction.

A560. The Engagement Letter defines an “Alternative AMR Acquisition Transaction”

as:

[A]ny merger, consolidation or other business transaction with respect to which

the Company participates in conjunction with one or more other entities and

which involves a merger, consolidation or other business combination or

acquisition transaction pursuant to which the business and assets of Emergency

Medical Services Corporation, the parent company of AMR, undergoes a change

in control and the result of which is that the business and assets of AMR are

combined with, or operated under a common management structure which

includes, the Company. For the avoidance of doubt, an Alternative AMR

Acquisition Transaction shall not include a Sale Transaction or an AMR

Acquisition Transaction.

Id. The Engagement Letter defines a “Sale Transaction” as:

[A]ny (i) merger, consolidation, or other business combination transaction

pursuant to which the Company is to be acquired by, or combined with, another

entity, (ii) any sale or disposition by the Company of an interest in material assets

of the Company, or (iii) any recapitalization, restructuring, or other transaction or

series of transactions involving the sale or disposition of capital stock of or other

equity interest in the Company which has the effect of transferring a majority in

interest or control of the Company. For the avoidance of doubt, a Sale

Transaction shall not include an AMR Acquisition Transaction or an Alternative

AMR Acquisition Transaction.

Id. Notably, these definitions all contemplate a transaction involving the Company—not

transactions that are not inclusive of the Company.

28

RBC’s provision of financing to an acquirer of EMS in a transaction that does not involve

Rural.

Further, in Section 2.f), the Engagement Letter’s disclosures with respect to the

EMS process provide that “RBC and Moelis shall have the sole and exclusive right to

provide certain investment banking and financial advisory services with respect to an

acquisition or combination transaction with respect to [EMS] or EmCare Holdings Inc.,

other than an Alternative AMR Acquisition Transaction.” This language refers to RBC’s

possible participation in a transaction between Rural and EMS, but does not expressly

touch upon RBC’s buy-side role in any EMS transaction not inclusive of Rural.30

The Engagement Letter, in Section 9 entitled, “Other Matters Relating to

Engagement,” sets forth generic and boilerplate disclosures with respect to the provision

of financial products by both RBC and Moelis. In part, it provides that RBC “may also

provide a broad range of normal course financial products and services to [its]

customers” and “may arrange and extend acquisition financing or other financing to

purchasers that may seek to acquire the Company and/or to the same or different

purchasers that may seek to acquire companies or businesses that offer products and

30

This provision of the Engagement Letter further provides:

The terms and conditions relating to any such services will be outlined in a

separate proposal and the fees for such services will be in addition to fees payable

hereunder. Any such proposal will be negotiated separately and in good faith, set

forth in a separate written agreement, and be consistent with prevailing industry

practice. Notwithstanding the foregoing, any fees resulting from such advisory

services shall be paid in the following manner: 60% of the fee will be paid

directly to RBC and 40% of the fee will be paid directly to Moelis.

A554.

29

services that may be substantially similar to those offered by the Company.” Section 9

fails to specifically state that RBC would seek to leverage its Rural engagement to

provide financing in a separate EMS transaction, nor does it disclose that RBC would

favor its interests as a lender over those of the Company. As to Section 9, the trial court

held that, “[t]his generalized acknowledgment that RBC . . . might extend acquisition

financing to other firms did not amount to a non-reliance disclaimer that would waive or

preclude a claim against RBC for failing to inform the Board about specific conflicts of

interest.”31

Section 4 of the Engagement Letter sets forth the agreement as to the

compensation to be paid to RBC and Moelis for their services. For its fairness opinion,

RBC was entitled to $500,000, payable upon the delivery of the opinion, “without regard

to the conclusion reached in such opinion or whether such opinion [was] accepted or a

Transaction [was] consummated.”32 The fairness opinion fee was to be credited against

any transaction fee.

Under Section 4, the Engagement Letter provided for various transaction fees.

First, the Engagement Letter provided for a Sale Transaction Fee:

In the event the Company consummates at any time a Sale Transaction

pursuant to a definitive agreement or letter of intent or other evidence of

commitment entered into (i) during the Term, or (ii) during the nine (9)

31

Rural I, 88 A.3d at 101 (citation omitted).

32

A555; Engagement Letter § 4.b). The Engagement Letter, in Section 4.c), also provided for an

Announcement Fee: “In the event that . . . the Board of Directors requests a fairness opinion

from either, but not both of, RBC or Moelis, an announcement fee (“Announcement Fee”) of

$500,000 shall be payable to the Advisor . . . from which a fairness opinion has not been

requested.” Id. The Announcement Fee was to be credited against the transaction fee or the

termination fee for any transaction related to the Engagement Letter. Id.

30

months following the Term, the Company agrees to pay RBC and Moelis a

total transaction fee . . . equal to the sum of (A) 1.00% of the Aggregate

Transaction Value . . . to the extent that the price to be paid to stockholders

of the Company is at or below $16.00 per share, and, in addition, (B) 3.0%

of the Aggregate Transaction Value to the extent related to the price to be

paid to stockholders of the Company in excess of $16.00 per share.33

The Sale Transaction Fee was to be paid at closing in the following manner: “60% of the

fee will be paid directly to RBC and 40% of the fee will be paid directly to Moelis.”

Second, if Rural consummated, at any time, an AMR Acquisition Transaction

pursuant to an agreement entered into during a specified time period, the Company

agreed to pay RBC and Moelis $3,500,000. Another provision addressed a transaction

fee payable in the event Rural consummated an Alternative AMR Acquisition Transction.

Third, if the Company received a break-up fee or other termination fee in

connection with a Sale Transaction, Rural agreed to pay RBC and Moelis 20% of the

break-up or termination fee received by the Company. Like the other fees, 60% was

payable directly to RBC and 40% was payable directly to Moelis. Thus, with the

exceptions of the fairness opinion fee and termination fee, the fees that RBC and Moelis

were to receive were contingent upon the Company consummating a transaction.

On March 18, 2011, RBC sent Warburg executed commitment papers, but

Warburg did not respond. The trial court found that, on the day before the merger was

approved, RBC’s most senior bankers made a final push to obtain Warburg’s financing

business. The evidence clearly supports the trial court’s findings. For example, a

contemporaneous RBC internal memorandum documented that the bank’s “[d]eal team

33

A555; Engagement Letter § 4.d) (alternations removed).

31

[was] working with Warburg Pincus on a final round bid.” The memorandum continued:

“Other banks potentially providing papers to our sponsor include [Credit Suisse

Securities (USA) LLC], Jeffries [Finance LLC] and [Citigroup Global Markets Inc.]”

As part of its push to secure Warburg’s business, RBC bankers sought internal

approval to underwrite 100% of a $590 million financing package for Warburg. RBC’s

bankers stated the following in their memorandum regarding the Rural deal:

[Warburg], covered by David Daniels, is a top tier client of the Financial

Sponsors Group. RBC has an active dialogue with [Warburg] across all of

its industry verticals and has generated [approximately] $6mm in fees from

deals with this sponsor. We are supporting the proposed financing

commitment associated with the purchase of [Rural] as it will further

strengthen our relationship and lead to additional deal flow with [Warburg].

Before the bid deadline, Carney emailed a Warburg colleague with an update on the

Rural process: “I think we are in a good position. [DiMino] likes us a lot, the bankers

are pulling for us, and we are the premier firm involved in the process.”34

On the extended bidding deadline of March 22, 2011, Warburg submitted a bid at

$17.00 per share, and CD & R submitted an indication of interest at $17.00 per share,

subject to further diligence. American Securities “indicated that their current valuation

was below their initial indication of interest on February 1, 2011 of $16.00 to $17.00 per

share and that they expected remaining diligence would take approximately 2-3

weeks[.]”35

On March 23, the Special Committee met to discuss the offers received from

Warburg and CD & R. Conrad, Holland, DiMino, Wilson, RBC, and Moelis were also

34

B251.

35

A834.

32

present at the meeting by invitation. Munoz and his colleagues at RBC debated whether

to provide valuation materials to the Special Committee to enable them to evaluate the

bids. Munoz was worried that RBC would be asked about valuation.

The trial court found that, with bids in hand, the relationship between RBC and

Shackelton changed. Before the bids, they shared the goal of wanting the Company sold.

But Shackelton wanted more than $17.00 per share, and RBC “just wanted a deal.” At

this point, DiMino became RBC’s “principal ally” in the boardroom. Like RBC, DiMino

had an incentive to sell the Company and continue managing it for Warburg. As

evidence of this, in advance of the Special Committee meeting, Munoz scheduled a call

with Shackelton to “manage him.”36

The trial court determined that the Special Committee decided not to engage

further with CD & R, and that “[t]he Special Committee directed RBC and Moelis to

engage in final negotiations with Warburg over price.”37 RBC reviewed the offers with

the Special Committee on March 23, 2011. “Warburg’s offer constituted a proposal to

acquire all of the Company’s outstanding common stock for $17 per share, with no

further confirmatory due diligence. Along with its offer, Warburg had submitted fully

committed equity and debt commitment letters . . . .”38 With respect to CD & R, the

minutes reflect that RBC represented to the Special Committee that the private equity

firm’s “offer constituted a proposal to acquire all of the outstanding Company Common

Stock for $17 per share, subject to confirmatory due diligence. CD&R’s offer letter

36

B285.

37

Rural I, 88 A.3d at 76.

38

A804.

33

reiterated its previous statements to RBC and Moelis that CD&R was unable to fully

commit to a definitive transaction to acquire [Rural] until the closing of its acquisition of

[EMS] . . . .”39

The Special Committee ultimately rejected the proposals received from Warburg

and CD & R. The minutes do not reflect a discussion of valuation or the design of the

sale process. The trial court observed that the Board had no valuation materials beyond a

one-page transaction summary that compared the metrics implied by a $17.00 per share

offer to the metrics implied by Rural’s closing market price of $12.38 on the prior day.

According to the minutes, Shackelton, Davis, and Walker proceeded on that basis as

follows:

[T]he Special Committee determined that the purported offer from CD&R

did not provide the Company any certainty of a successful transaction, and

did not otherwise present a compelling case for pursuing a transaction with

CD&R at this time, given that it did not have committed financing and that

it did not provide any indication of the merger agreement terms it would

require. The Special Committee directed RBC and Moelis to contact

Warburg to engage in further negotiations to improve its offer in terms of

the price to be paid to the stockholders of the Company . . . .40

The trial court found that RBC “encouraged DiMino to drum up director support

for Warburg’s bid” and presented a board book “designed to convince [the Board] to

accept Warburg’s bid . . . .”41 RBC’s internal communications before the March 23

meeting of the Special Committee reflect the bank’s position that closing on the Warburg

offer and obtaining the private equity firm’s buy-side financing business were its

39

Id.

40

A805.

41

Rural I, 88 A.3d at 96.

34

priorities when advising the Board. Munoz emailed his RBC colleagues on March 23:

“Let’s all plan to do a call w/ Shackelton before [the] Board call. Need to send him the 1-

2 [valuation] pages we discussed to him [sic] before we get on [the] phone. Need to

manage him before he gets on w/ [the] Board.”42 On March 24, Munoz emailed Daniel:

“Told dimino to start working the board. He said he’ll start calling each of them

tomorrow.”43 Munoz also emailed DiMino: “Focus on [the] board today. Let me know

if you need more tidbits to help you. Once again, last time [Rural’s] stock was at $17

was in 1998.”44

Shackelton contacted Carney, the head of Warburg’s acquisition team, on March

25, 2011. Carney shared with a colleague, Elizabeth “Bess” Weatherman, the following:

“The Chairman (who I gather is in his early 30s) and I just spoke for 15 minutes.

Pleasant tone. He offered to drop the Go Shop, give us a voting agreement, and move a

bit on the break-up fee if we agreed to bump to $17.50. I declined.”45 Carney concluded

his sale process update to Weatherman by remarking: “I know [Rural’s] bankers are now

nervous and want to get something done.”46

On March 25, Warburg increased its bid to $17.25 per share. Warburg’s bid

materials did not include staple financing from RBC.47

42

B285.

43

B286.

44

B287.

45

B291.

46

Id.

47

Warburg’s March 22 bid included three commitment letters, one from each of Credit Suisse

Securities (USA) LLC, Citigroup Global Markets Inc., and Jeffries Finance LLC. Collectively,

the commitment letters provided Warburg with 100% financing for the transaction.

35

Following Warburg’s submission of its bid, RBC did not disclose to its client that

it continued to seek a buy-side financing role with the private equity firm. As to the

Board, the trial court concluded that “[t]he Rural directors did not provide any guidance

about when staple financing discussions should start or cease, made no inquiries on that

subject, and imposed no practical check on RBC’s interest in maximizing fees.” For

example, DiMino was asked at trial:

Q. Now, between this date, December 23rd, and early February, do you

recall a single conversation you had with Mr. Munoz or anyone else at RBC

in which you specifically discussed with them what they were doing with

regard to achieving staple financing from -- from any potential buyer of

RBC [sic]?

A. No.48

In his deposition testimony, Carney confirmed that RBC continued to push for

Warburg’s financing business, even after Warburg’s bid excluded the bank’s

commitment papers:

Q. And at some subsequent date did RBC express interest -- continued

interest in offering debt financing to Warburg Pincus?

A. As I recall, yes.

Q. And what do you recall of the nature of that expression of interest by

RBC?

A. My recollection is that RBC was just -- was trying to find a way to

participate in the debt financing somehow.

...

Q. . . . And was there any subsequent discussion with RBC, perhaps

more definitive or more following up, on a subsequent date?

48

A2211-12.

36

A. . . . I do recall that we had additional conversations with RBC

because they continued to try to find a way into the financing, and we

continued to tell them that that was not going to happen.49

When directed by the Special Committee to engage in final price negotiations with

Warburg, RBC again did not disclose that it was continuing to seek a buy-side financing

role with Warburg. On Saturday, March 26, 2011, senior bankers at RBC continued to

press Warburg to include RBC in the financing package.50 Munoz testified at trial as

follows:

Q. . . . So the most senior people at RBC are trying to make a last effort

to see whether RBC can get involved in the staple on Saturday, March 26th;

correct?

A. Yes.51

Blair Fleming, RBC’s Head of U.S. Investment Banking, as an inducement, offered to

have RBC fund a $65 million revolver for a different Warburg portfolio company.52

Later, in an email to Munoz, Fleming stated: “I’m gonna call warburg myself. We just

committed 65 to their effing revolver.”53

F. RBC’s Manipulation of the Valuation Process

On Saturday, March 26, 2011, the RBC fairness opinion committee met to discuss

Warburg’s bid for Rural. In addition to Daniel and Munoz, several members of the RBC

deal team attended the meeting. Ali Akbar and Allen Morton, along with Daniel, served

49

B610.

50

A2192-93.

51

Id.

52

A2192; B329.

53

B326.

37

on the “committee.” Morton “had previously been the head of M&A at RBC U.S., and . .

. Akbar, [was a] managing director in the M&A group.”54 The committee members

reviewed the fairness presentation and letter, and “recommended certain changes” to the

same.55

The record evidence supports the trial court’s factual finding that, on the deal

front, RBC worked to lower the analyses in its fairness presentation so Warburg’s bid

looked more attractive. Specifically, the trial court found that RBC made a series of

changes to its fairness analysis. First, RBC decided not to rely on the single comparable

company for valuation purposes. The record evidence reflects that RBC’s preliminary

fairness opinion deck applied peer group trading multiples to various valuation metrics.

In the final draft of the fairness presentation, however, RBC represented to the Board that

it “[d]id not rely on comparable company analysis for valuation purposes.” The

comparable company analysis nevertheless remained in the fairness materials, although it

was removed from the valuation football field.56

Second, the trial court found that RBC modified its precedent transaction analysis

by reducing the low end multiple used in both the management case and “consensus”

case, with the effect being that the alteration lowered the bottom end of the management

54

A2403. At the time of the transaction, RBC’s fairness committee formation process was ad

hoc, such that “anyone who was a managing director in the M&A group could serve on the

fairness committee. And each time there was a fairness opinion to be discussed, [RBC] needed

to have at least two independent members, independent meaning the non-sponsoring member . . .

.” Id. Daniel was the sponsor, and Morton and Akbar were the “independent members.” Id.

Akbar had never served on a fairness committee.

55

A824; A2124.

56

Valuation football fields are used to summarize valuation ranges in connection with business

combinations. Typically, they provide the valuation ranges corresponding to each of the

valuation methodologies used for a given M & A transaction.

38

case precedent transaction range and “consensus” case precedent transaction range. The

morning draft of the fairness opinion presentation used a multiple range of 7.5x to 9.5x,

implying a low end per share valuation of $15.49 for the management case. The

afternoon draft that was ultimately presented to the Board used a range of 6.3x to 9.5x,

resulting in a low end per share valuation of $11.54 for the management case. The trial

court also found that, on the morning of Saturday, March 26, 2011, “the ‘consensus’

precedent transaction range was $13.31 to $19.15. On Saturday afternoon, it was $8.19

to $16.71, entirely below the deal price.” In altering its analysis, RBC decided to weigh

heavily the 2004 acquisition of AMR by Onex Partners at 6.3x EBITDA, a course of

action it had discredited earlier. The trial court observed that this change was

inconsistent with RBC’s December 2010 pitch book, where RBC assigned AMR a low-

end multiple of 8.0x and suggested that Rural pay 8.4x for AMR. This change was also

inconsistent with RBC’s view, expressed throughout the sale process, that Rural’s

operating metrics were objectively superior to AMR’s.

Finally, the trial court determined that RBC lowered the “consensus” Adjusted

EBITDA for 2010 from $76.5 million to $69.8 million to make the Warburg “deal look

more attractive.”57 In material presented to the Board before it had the March offer from

Warburg in hand, RBC added back approximately $6.3 million in certain one-time

expenses when calculating Rural’s Adjusted EBITDA for 2010. The preliminary draft of

the fairness opinion presentation contained a Consensus Adjusted EBITDA figure of

$76.5 million and, in a footnote, RBC noted that “EBITDA is adjusted for stock based

57

Rural I, 88 A.3d at 77.

39

[sic] compensation, gain on sale of assets and one time [sic] expenses.”58 The morning

draft also suggested that “[c]onsensus pro forma adjustments would be unlikely” to

account for certain of the one-time expenses.59 The final fairness presentation deck stated

that “Wall Street research analysts covering [Rural] do not make pro forma

adjustments[.]”60 The Consensus Adjusted EBITDA figure in the final draft was $69.8

million.61

Munoz, in the lead up to finalizing the fairness opinion presentation, emailed his

colleagues saying that RBC would “need to add some bullets that say Wall Street analyst

[sic] do not reflect any of these one-time expenses. Something to explain why we are not

adjusting[.]”62 Similarly, after receiving the fairness opinion deck, Daniel had several

questions with respect to the valuation analysis. In a message to Munoz and other RBC

bankers with comments to the initial draft of the fairness presentation, he noted:

10: I thought we were looking @ an ebitda multiple around 9.0. What’s

changed?

20: maybe it’s just because I’m tired but I think it’s confusing in terms of

what ebitda we’re applying. . . . This isn’t reader friendly enough.

21/22: I’d like thoughts on why there’s [sic] no qualitative comments here.

I know our internal discussions + justification. But for a new reader, the

fact that we only have 1 comp and that the most recent precedents are

58

B305.

59

B316.

60

A873.

61

Id. The evidence shows that certain Wall Street firms suggested that one-time expenses

needed to be added back and others chose to exclude those expenses when calculating the 2010

Adjusted EBITDA for the Company, although those that refrained from adding the expenses

back generally noted the one-time adjustments in the text, as RBC acknowledges. Thus, we do

not find the trial court’s factual determinations to be clearly erroneous.

62

B327.

40

higher than our deal raises issues. While I know we will explain to [the

Board and Special Committee], is there a reason why we don’t do so in the

text. [sic]63

The record reveals that Munoz coordinated between the senior RBC bankers

lobbying Warburg and the RBC deal team working on the fairness opinion, but he did not

disclose RBC’s activities to the Board. Further, the trial court found that RBC “failed to

provide Rural’s Board or the Special Committee with a preliminary valuation analysis”

for three months.64 The trial court noted that, in fact, beyond the December 2010 RBC

pitch book—which contained materially different analyses and which only the Special

Committee was privy to—the Board had not seen valuation materials before March 27,

2011.65 The evidence supports the Court of Chancery’s conclusions. The investment

bankers were well aware that they “had not provided any preliminary valuation analysis

since December 23, 2010, and had only provided [the] December 23 book to the Special

Committee,”66 as opposed to the entirety of the Board. Munoz testified at trial as

follows:

Q. And isn’t it the case, sir, that it was not until Sunday night, March

th

27 , that RBC delivered to Rural/Metro’s board or special committee a

DCF analysis of the management projections that had been sent to the

bidders back in January?

A. We did -- that was the -- we did a DCF in December and, yes, the

next time we did a DCF was, yes, at that time; right.

63

B293.

64

Rural I, 88 A.3d at 95.

65

Id. The trial court found that the December pitch book showed that Rural’s value on a stand-

alone basis exceeded what a private equity bidder willingly would pay for the Company. It

found that the evidence at trial established that the value of Rural as a going concern exceeded

what the stockholders received in the merger.

66

Id. at 100.

41

Q. Next time you did a DCF after that pitch book on December 23rd was

on March 27th, 2011; correct?

A. Yes. That’s all that the company asked and requested, yes.”67

Before the meeting at which the Board resolved to sell the Company, Munoz

shared with his RBC colleagues: “I’m worried that someone will . . . ask about our views

on [Rural] valuation.”68 In a March 23 email thread with his banking colleagues, the

RBC Managing Director reiterated that he was “afraid [the] board will ask us of our high

level views [on valuation] today.”69 After Daniel told Munoz that RBC had not planned

on providing valuation materials that day, Munoz repeated: “Ok. But we will be asked

and to convince [S]hackelton we need to show valuation. Perhaps we just put together 2-

3 pages and just send to [S]hackelton[.]”70

The trial court found that, in performing its DCF analysis, RBC used an exit

multiple range of 7.0x to 8.0x, which did not match up with the range used for RBC’s

precedent transaction analysis. On the basis of that exit multiple range, RBC’s DCF

analysis in the preliminary fairness opinion deck reflected a range of $16.49 per share to

67

A2107-08. Munoz continued:

Q. . . . And then with that caveat of sharing the EMS transaction multiple, did you

actually share a precedent transaction analysis or a comparable company analysis

between December 24th and March 26th?

A. The only thing I believe we shared during that time frame was the EMS

transaction. We did not share both a comparable and a precedent.

A2108.

68

B252.

69

B284.

70

Id.

42

$21.35 per share.71 When Munoz saw the DCF analysis during the afternoon of March

26, he emailed his RBC colleagues: “I thought we were going to try to reduce dcf?”72

RBC’s final DCF analysis reflected a range of $16.28 per share to $21.07 per share.

Notably, the LBO analysis deck, dated February 9, 2011, which was provided to DiMino

by RBC, employed an exit multiple range of 7.8x to 8.3x.

On March 26, RBC’s ad hoc committee “approved the fairness opinion

presentation and letter via email and verified that the opinion could be delivered to”

Rural’s Board that day.73 RBC’s one-page document memorializing the meeting suggests

that “[a]fter making the suggested changes and receiving approval from outside legal

counsel, the deal team notified the committee of the revised fairness opinion presentation

and letter via email.”74 Morton and Akbar, however, provided limited oversight, and the

former signed off on the revised book without reading it.75 The fairness opinion was

delivered to the Board later that evening.

G. The Board’s Acceptance of the Revised Warburg Offer

The trial court found that, during the final negotiations with Warburg, the Board

failed to provide active and direct oversight of RBC. It observed that when the Board

approved the merger, the directors were unaware of RBC’s last minute efforts to solicit a

71

B321.

72

B327.

73

A824.

74

Id.

75

In an email regarding the revised fairness presentation and letter, Morton stated: “The ravpn

network is not letting me in so I cannot see the revised book. If there are no material changes

from what we reviewed yesterday, other than the changes that were recommended on the call,

then I am fine with it.”

43

buy-side financing role from Warburg, had not received any valuation information until

three hours before the meeting to approve the deal, and did not know about RBC’s

manipulation of its valuation metrics. The record evidence supports the Court of

Chancery’s findings.

Unbeknownst to the Rural directors, RBC had been communicating with Warburg

in the lead up to the private equity firm’s revised bid. Carney emailed his private equity

firm colleagues the following:

I have spoken to a number of bankers on our side (for advice) and theirs

(for back-channel feedback). There are definitely two other offers as we

suspected, both say they need another week of work but the company’s

bankers think it is more like 2-3 weeks. Sounds like both are higher but

again not a knock-out, I haven’t been able to get more specific info than

that.

The BOD is split. Some are ready to vote yes for us now. Others want to

try to get a little more from us, and some a lot more, with silly numbers like

$18 being thrown around in the BOD room. The company’s bankers think

this may just be posturing in front of the bankers, and the bankers have told

the BOD that a number like that is not likely to happen ever and certainly

not from us.

I think our FL [Joe Landy, Warburg’s Co-President] is probably more right

than wrong. I think we probably win if we bump at all and $0.25 may be

best in terms of helping the BOD drive to a quick consensus. In any event I

am convinced we should empty the tank, tell them best and final, and be

done. It sounds like the BOD needs to hear that and know there is a binary

decision to make on price.76

On March 25, Warburg submitted its best and final offer of $17.25 per share.

Warburg determined to proceed without utilizing RBC’s commitment papers, despite the

offer to fund the sponsor’s revolver and the bank’s other inducements. Munoz and Blair

76

B290; see also B609.

44

Fleming, RBC’s Head of U.S. Investment Banking, shared the following email exchange

concerning the bank’s inability to capture the private equity firm’s buy-side financing

business:

Munoz: I am the rbc guinea pig. Never easy[.]

Fleming: Yep. Amazing. I have to go see warburg this week. I just

pushed 65 revolver through[.]

Munoz: Lets [sic] make sure all rbc bankers know they owe us big time.

Should be first page of all pitch books.

Fleming: Our revolver in rural is gonna be very very small.77

On Sunday, March 27, 2011, the Board met to consider the potential merger.

According to the trial court, the Rural directors received written valuation analyses from

RBC and Moelis at 9:42 p.m. Eastern time. Because the Board had received no valuation

materials until three hours before the meeting to approve the merger, it found that the

Rural directors did not have a reasonably adequate understanding of the alternatives

available to Rural, including the value of not engaging in a transaction at all. At 9:27

p.m., RBC distributed its fairness opinion deck to Shackelton and DiMino. Moelis

distributed its Board materials to Shackelton and DiMino shortly before, at 9:20 p.m.

The valuation materials were the first the Board had received since December 2010. At

11 p.m. that evening, without knowledge of RBC’s downward modifications to its

analysis, back-channel communications with Warburg, and late push to get on the private

equity firm’s financing tree, the Board and Special Committee held a joint meeting.

Shackelton led the meeting before turning it over to RBC, which discussed “the implied

77

B329.

45

transaction multiples” and the premium that Warburg’s offer represented over Rural’s

current and historical trading prices. Daniel “reviewed RBC’s valuation methodologies”

with the Board. Shackelton later requested that RBC deliver its financial analysis “and

an oral fairness opinion to the Board.” RBC opined that the transaction was fair from a

financial point of view. The Board approved the merger with Warburg after midnight.

H. The Rural Proxy Statement

The definitive proxy statement was filed on May 26, 2011 (the “Proxy

Statement”). The trial court concluded that the Proxy Statement contained materially

misleading disclosures in the form of false information that RBC presented to the Board

in its financial presentation. Specifically, the trial court found that information that RBC

provided to the Board in connection with its precedent transaction analyses was false, and

that false information was repeated in the Proxy Statement.

RBC used the $69.8 million figure in conducting its precedent transaction

analysis. The Proxy Statement’s pertinent discussion of Adjusted EBITDA, however,

refers to a $76.8 million figure and provides that RBC’s precedent transaction analysis

adjusted for “stock-based compensation, certain one-time expenses, management fees

and other expenses . . . .”78 A stockholder reading the Proxy Statement would likely

incorrectly conclude that RBC’s precedent transaction range used the disclosed Adjusted

EBITDA that added back one-time expenses for 2010. Similarly, a stockholder reading

the Proxy Statement would likely incorrectly conclude that the resulting figures were

consistent with a Wall Street consensus.

78

A1100.

46

The trial court also found that the Proxy Statement contained false and misleading

information about RBC’s incentives and conflicts of interest.79 The Proxy Statement

indicated that the Special Committee was advised of “the potential conflict of interest”

regarding RBC, “which had expressed a willingness to offer buy-side financing for any

sale transaction that may be pursued . . . .”80 As to Warburg’s potential use of RBC’s

financing package, the Proxy Statement merely provides: “Although RBC had indicated

to potential buyers its willingness to offer buy-side financing and certain of the potential

buyers had considered using such financing, the Warburg Pincus bid did not include the

financing which it had been offered by RBC.”81 The Proxy Statement omits discussions

of RBC’s staple financing efforts—in both the Rural and EMS deals—and last minute

push to reserve a place on Warburg’s financing tree. The disclosure also fails to inform

Rural’s stockholders that RBC sought to use its Rural engagement to obtain EMS buy-

side financing work.

The proxy advisor, Glass, Lewis & Co., LLC (“Glass Lewis”), recommended that

Rural’s stockholders vote for the merger proposal, reasoning, in part: “[W]e consider

that the [B]oard conducted a sufficiently thorough review that would be reasonably

expected to generate the greatest possible value for Rural and its shareholders.”82

Further, Glass Lewis suggested that the transaction with the sponsor was advisable

because “[t]he [B]oard, with the assistance of independent advisers, conducted a full

79

See Rural I, 88 A.3d at 106. We similarly collectively refer to the two disclosure claims

discussed above as the “Disclosure Claim.”

80

A1090.

81

A1092.

82

B400.

47

auction process prior to executing a deal with Warburg.”83 For similar reasons, ISS

recommended that the Company’s stockholders vote for the Warburg deal. With respect

to RBC, ISS acknowledged that the bank was permitted to provide buy-side financing,

but, as the trial court observed, incorrectly concluded that RBC had no other conflicts and

that the Board sufficiently mitigated potential conflicts of interest. To that end,

elsewhere in its advisory materials, ISS determined that “there are no concerning

conflicts of interest.”84

The Proxy Statement also disclosed that the Special Committee concluded that

“RBC’s willingness to offer buy-side financing could significantly enhance a potential

sale process because such financing could be offered efficiently and could provide a

source for financing on terms that might not otherwise be available to potential buyers of

the Company . . . .”85 This, however, was not true. The Board never concluded that RBC

might provide financing on terms that otherwise might not be available. When discussing

the “major concern” associated with RBC’s potential offer of staple financing at the

December 23, 2010 meeting of the Special Committee, counsel for the Special

Committee noted that such an offer “could provide a floor for financing that would be

available to potential purchasers of the Company.”86

83

B399.

84

B407.

85

A1090.

86

A407.

48

On June 30, 2011, the transaction was announced. The Agreement and Plan of

Merger, dated as of March 28, 2011, provided the Board with a fiduciary out that enabled

it to consider higher bids. No other bidders emerged.

I. RBC’s Public Statements and Pleadings Concerning Staple Financing

Jervis raises a number of points regarding RBC’s litigation conduct. These points

later formed the basis, in part, for Jervis’s fee shifting motion. On February 12, 2015, the

Court of Chancery held a hearing and ultimately concluded that RBC “approached the

pretrial briefing and trial as if the issue wasn’t what actually happened and what was true

as to the facts within their control but, rather, whether the plaintiff had generated

discovery that could prove something different.”87 The trial court suggested that RBC’s

bad faith litigation conduct touched upon its failure to appropriately characterize its staple

financing efforts; the interactive dynamic between its financing and M & A teams; and,

perhaps most problematically, the nature of its pursuit of Warburg’s buy-side financing

business. Despite the fact that these misstatements struck at central issues before the

Court of Chancery for adjudication, the trial court concluded that fee shifting was not

warranted because RBC’s misstatements did not cross the threshold of “glaring

egregiousness.”88 In addition to noting that RBC’s trial conduct was “aggressive” and

“problematic,”89 the Court of Chancery remarked: “Here, I think there’s [sic] glimmers

of egregiousness. I think there’s some egregiousness.”90

87

Ans. Br. Ex. A. Tr. 68:5-10 (Feb. 12, 2015).

88

Id. at 72:22.

89

Id. at 72:20-21.

90

Id. at 68:1-2.

49

This ruling forms the basis of Jervis’s cross-appeal, which we also address below.

III. ANALYSIS

A. Revlon

1. Contentions of the Parties

RBC argues that the trial court erred by holding that the Board breached its duty of

care under the enhanced scrutiny articulated in Revlon, Inc. v. MacAndrews & Forbes

Holdings, Inc.91 While RBC agrees that Revlon applies, it argues that the trial court

incorrectly applied Revlon’s enhanced scrutiny to the December 2010 time-frame, when

it contends that the Company was merely exploring strategic alternatives; that the

Board’s actions do not fail Revlon scrutiny in view of the public auction, modest deal

protections, and the 90-day post-signing market check; and that the trial court erred by

finding a due care violation without finding gross negligence.

Jervis argues that RBC’s Revlon arguments are meritless. Neither party argued in

the trial court that Revlon’s enhanced scrutiny applied. In fact, Revlon was not addressed

in any pre- or post-trial briefing. In the Court of Chancery, Jervis asserted that the entire

fairness standard applied. Jervis contends that this Court can affirm on an alternative

basis and uphold the ruling that the Board breached its fiduciary duties because the

transaction was not entirely fair.

91

506 A.2d 173 (Del. 1986).

50

2. Standard of Review

Our review of a trial court’s application of enhanced scrutiny to board action

necessarily implicates a review of law and fact.92 The deferential “clearly erroneous”

standard applies to findings of historical fact.93 “That deferential standard applies not

only to historical facts that are based upon credibility determinations[,] but also to

findings of historical fact that are based on physical or documentary evidence or

inferences from other facts. Where there are two permissible views of the evidence, the

factfinder’s choice between them cannot be clearly erroneous.”94 The Court of

Chancery’s legal conclusions are reviewed de novo.95 This Court may affirm on the basis

of a different rationale than that which was articulated by the trial court, if the issue was

fairly presented to the trial court.96

3. Discussion

In Malpiede v. Townson, this Court explained that enhanced scrutiny under Revlon

does not change the nature of the fiduciary duties owed by directors:

Revlon neither creates a new type of fiduciary duty in the sale-of-control

context nor alters the nature of the fiduciary duties that generally apply.

Rather, Revlon emphasizes that the board must perform its fiduciary duties

in the service of a specific objective: maximizing the sale price of the

enterprise. Although the Revlon doctrine imposes enhanced judicial

scrutiny of certain transactions involving a sale of control, it does not

92

See Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1385 (Del. 1995) (applying de novo

review to the Court of Chancery’s legal conclusions and clear error review to its factual

findings).

93

See DV Realty Advisors LLC v. Policemen’s Annuity & Ben. Fund of Chicago, Ill., 75 A.3d

101, 108-09 (Del. 2013).

94

Bank of N.Y. Mellon Trust Co., N.A. v. Liberty Media Corp., 29 A.3d 225, 236 (Del. 2011).

95

Unitrin, 651 A.2d at 1385.

96

Id. at 1390 (citing Standard Distrib. Co. v. Nally, 630 A.2d 640, 647 (Del. 1993)).

51

eliminate the requirement that plaintiffs plead sufficient facts to support the

underlying claims for a breach of fiduciary duties in conducting the sale.97

“In the sale of control context, the directors must focus on one primary objective—to

secure the transaction offering the best value reasonably available for the stockholders—

and they must exercise their fiduciary duties to further that end.”98 Revlon “requires us to

examine whether a board’s overall course of action was reasonable under the

circumstances as a good faith attempt to secure the highest value reasonably attainable.”99

As we recently reiterated in C & J Energy, “there is no single blueprint that a board must

follow to fulfill its duties, and a court applying Revlon’s enhanced scrutiny must decide

whether the directors made a reasonable decision, not a perfect decision.”100

On appeal, both parties agree that Revlon applies—only they differ as to when, in

the continuum between December 2010 and March 2011, Revlon’s enhanced scrutiny

was triggered. At oral argument, counsel for RBC contended that Revlon applied “at the

point where the auction was coming to an end and they had two bids, and they were then

in a position of deciding to sell the Company -- when the sale of the Company became

inevitable . . . . That’s when it became inevitable in this fact pattern.”

As to RBC’s argument that the business judgment rule—not Revlon—applies to

the Board’s decision to explore strategic alternatives in December 2010, the most faithful

reading of the record before us is that the Court of Chancery, as a factual matter, found

97

Malpiede v. Townson, 780 A.2d 1075, 1083-84 (Del. 2001) (citations omitted).

98

Paramount Commc’ns Inc. v. QVC Network Inc., 637 A.2d 34, 44 (Del. 1993).

99

C & J Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret. Trust, 107

A.3d 1049, 1066 (Del. 2014) (citing QVC, 637 A.2d at 41; Unitrin, 651 A.2d at 1385-86).

100

Id. at 1067 (citations omitted) (internal quotations omitted).

52

that there was no exploration of strategic alternatives. Instead, the trial court found that

the Special Committee, acting “without Board authorization,” “hired RBC to sell the

Company.” On this point, the trial court concluded that, “[b]ased on the totality of the

evidence, the initiation of a sale process in December 2010 fell outside the range of

reasonableness[,]” that “Shackelton and RBC got too far out in front of the Board, and

[that] RBC’s advice was overly biased by its financial interests.”101

RBC does not challenge the predicate factual findings upon which the trial court’s

Revlon holding rests.102 There is sufficient evidence in the record to support the trial

court’s conclusions. For example, on December 23, DiMino emailed the head of RBC’s

Rural team, Munoz, the following: “Well done, lets [sic] get this baby sold!”103 Earlier

that day, Munoz notified his RBC colleagues: “Just got word we got the Rural Metro

sellside [sic] mandate.”104 RBC, thus, understood that it was engaged to sell the

Company. Munoz told other lead RBC bankers that the engagement “is the deal thats

[sic] going to put our Healthcare services sellside [sic] effort on the map. Big name

sponsors are going to look at this asset.”105

Other evidence suggests that RBC understood that it had been charged to sell

Rural. For example, an internal RBC memorandum documented that Rural engaged the

101

Rural I, 88 A.3d at 93.

102

RBC contends that “[u]nder the facts as found, Revlon scrutiny could not possibly apply to

the Board’s actions during December 2010 . . . .” Op. Br. 17 (emphasis added). It urges that this

Court “need not review any factual findings to determine that the trial court erred by applying

enhanced scrutiny to the Board’s decision to explore alternatives because this Court has twice

held that being in play does not trigger Revlon.” Id. at 18.

103

B106.

104

B108.

105

B107.

53

bank “as sell-side advisors to explore the sale of the Co[mpany].”106 The memorandum

continued, suggesting that the Rural “transaction represents an important Healthcare sell-

side mandate for the bank in addition to being a large fee event.”107

While the focus of the Special Committee and RBC in December 2010 was on

commencing a sale process, there is other evidence that, at least facially, suggests the

Special Committee had not completely abandoned the other alternatives.108 But “[w]here

the support in the record is sufficient for a factual finding, even if there can be a

reasonable difference of view, our standard of review compels us to defer to the trial

court. Our function here is not to substitute our judgment for the trial court’s as though

we had before us an original application.”109 Thus, we will not disturb the Court of

Chancery’s factual determination that, in December 2010, “the directors had never

106

B139.

107

B140.

108

For example, Rural’s Engagement Letter with RBC and Moelis stated that the two financial

advisors, together, were engaged to “provide certain investment banking and financial advisory

services in connection with the exploration by the Company of various strategic alternatives

including a possible Sale Transaction . . ., AMR Acquisition Transaction . . . or Alternative AMR

Acquisition Transaction . . . .” A551 (alterations removed). Further, on December 26, 2010,

Shackelton emailed the Board with an update on the Rural process, suggesting that the Special

Committee and its advisors were “continuing to refine a target list of [private equity] firms (10-

15)” for the “[p]artner/sale” process. B118. The email continued: “[W]e are considering the

benefits of more formally reaching out to 6-12 other [private equity firms] in order to gauge their

level of interest in Rural (either as a partner in an AMR acquisition or [as] an acquisition

target).” B118. Three days later, after holding a call with Shackelton to discuss the Rural

process, Tim Balombin, a member of RBC’s M & A team, communicated to Daniel the

following: “High level takeaway is that [Shackelton] supports a two track process and selling

the [C]ompany (even to the non-EMS winner), but also wants to ensure we preserve [the] ability

to buy AMR should the situation arise.” A544.

109

N. River Ins. Co. v. Mine Safety Appliances Co., 105 A.3d 369, 381-82 (Del. 2014) (citations

omitted). See Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1341 (Del. 1987)

(citing Levitt v. Bouvier, 287 A.2d 671, 673 (Del. 1972) (“We do not, however, ignore the

findings made by the trial judge. If they are sufficiently supported by the record and are the

product of an orderly and logical deductive process, in the exercise of judicial restraint we accept

them, even though independently we might have reached opposite conclusions.”)).

54

actually authorized a sale process[,]” and that “[i]t was Shackelton and RBC who

expanded their mandate into a sale.”110

As a legal matter, RBC’s counsel argued that Revlon could not apply in December

2010, since, at that point, the sale of the Company was not “inevitable.” Rather, RBC

contends that Revlon does not apply until the end of the process in late March 2011, since

Shackelton could not have sold Rural absent Board approval.

We have recognized at least three scenarios in which enhanced scrutiny under

Revlon is triggered, including:

(1) when a corporation initiates an active bidding process seeking to sell

itself or to effect a business reorganization involving a clear break-up of the

company[;] (2) where, in response to a bidder’s offer, a target abandons its

long-term strategy and seeks an alternative transaction involving the break-

up of the company[;] or (3) when approval of a transaction results in a sale

or change of control[.] In the latter situation, there is no sale or change in

control when “[c]ontrol of both [companies] remain[s] in a large, fluid,

changeable and changing market.”111

Further, in Revlon, we stated that “[t]he Revlon board’s authorization permitting

management to negotiate a merger or buyout with a third party was a recognition that the

company was for sale. The duty of the board had thus changed from the preservation of

110

Rural I, 88 A.3d at 73. The NACD argues that, “[i]f the Court of Chancery is correct that the

decision to initiate a sale process is subject to Revlon scrutiny, rather than the actions that follow

from a sale decision, that constitutes a tectonic shift in the fiduciary landscape for directors.”

NACD Br. 6. They argue further that “directors must be able to consider freely the exploration

of strategic alternatives (including a sale), without such discussions triggering Revlon’s duty to

maximize short-term value.” NACD Br. 7. We agree, and our narrow ruling premised on these

unusual facts effects no shifts in the Revlon landscape, let alone tectonic ones. The point the

NACD misses is that the trial court, as a factual matter, found that there was no exploration of

alternatives in December 2010, and that Shackelton and RBC had initiated an active sale process

without Board authorization.

111

Arnold v. Soc’y for Sav. Bancorp, Inc., 650 A.2d 1270, 1290 (Del. 1994) (internal quotations

omitted) (internal citations omitted) [hereinafter, “Arnold I, 650 A.2d at __”].

55

Revlon as a corporate entity to the maximization of the company’s value at a sale for the

stockholders’ benefit.”112 In Lyondell Chemical Co. v. Ryan, we held that enhanced

scrutiny did not arise “simply because [the] company [was] in play[,]”113 but rather as a

consequence of the fact that the “directors began negotiating the sale of [the

company].”114

Here, we are presented with the unusual situation where Shackelton and RBC—

and ostensibly the Special Committee—initiated a sale process in December 2010 that, at

the time, was not authorized by the Board, but which events were later purportedly

ratified by the Board on March 15, 2011. RBC argues that “the trial court repeated the

error that Lyondell reversed,” and that being “in play” is not enough: the Board must

embark on a change of control transaction, and that the focus should be at the end of the

process, because, they say, “[a]fter all, at the end of an auction, a board may decide to

refuse all offers.”115

We reaffirm our holding in Lyondell, and reject RBC’s attempt to delay the

triggering of Revlon to late March 2011 for three reasons. First, without genuinely

exploring other strategic alternatives, the Special Committee initiated an active bidding

process seeking to sell itself in December 2010, and the Board, on March 15, 2011,

purportedly “restated and ratified” the actions of the Special Committee, including the

initiation of the sale process that had transpired over the preceding months. The March

112

Revlon, 506 A.2d at 182.

113

Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 242 (Del. 2009) (quoting Paramount Commc’ns

v. Time Inc., 571 A.2d 1140, 1151 (Del. 1989)).

114

Id.

115

Op. Br. 20 (citation omitted).

56

15, 2011 minutes state, in a section entitled “Scope of authority – Special Committee,”

that the Company’s legal counsel reviewed with the Board “the resolutions adopted by it

to date in reference to the authority and activities of the Special Committee, and further

discussed updates to such resolutions that were desirable in view of the evolution of the

sale evaluation process . . . .” The Board resolution then “ratifies and restates” the

Board’s delegation to the Special Committee of the “exclusive power and authority” to,

among other things, “solicit proposals for a Potential Transaction,” “negotiate and

finalize terms of any such Potential Transaction,” and “report its findings and

recommendations to the full Board . . . .”116 The March 15 minutes state that the Board

was briefed on the Special Committee’s activities, and a logical inference is that its

resolution reflects the Board’s recognition of, and attempt to fix, the problem posed by

the Special Committee having exceeded its authority. Thus, the March 15 “restatement

and ratification,” which deemed the actions of the Special Committee to be acts of the

Company, undermines RBC’s contention that Revlon should not apply because action by

the full Board was required.117

116

A620. Notably, the prior grants of authority as reflected in the October 27 and December 8

minutes do not mention any grant of “exclusive” authority to the Special Committee. The

October 27, 2010 minutes refer to the “authority” of the Special Committee, not its “exclusive

authority.” A274. The December 8, 2010 minutes revised the scope of authority of the Special

Committee, but omit any reference to the Committee’s “exclusive power and authority.” See

A394.

117

A number of factors influence the amount and type of interaction between the board and a

special committee to which the board has delegated certain authority during the course of a sale

process. We adhere to our observations in C & J Energy that “perfection” is not the standard.

And while there is no blueprint for the degree and type of interaction required, the Board’s

passivity and lack of effective oversight of the sale process was unreasonable. Compare C & J

Energy Servs., 107 A.3d at 1060, 1066 (noting that while the C & J board process “sometimes

fell short of ideal,” the CEO/Chairman “continually shared the details of the valuation changes

57

Second, while RBC relies on Lyondell for the proposition that merely being “in

play” does not trigger Revlon, that case involved a third party putting the target company

in play. The third party’s Schedule 13D signaled to the market that Lyondell was “in

play,” but the directors decided that they would neither put the company up for sale nor

institute defensive measures to fend off a possible hostile offer. Instead, the directors

decided to take a “wait and see” approach. We held that, “[t]he time for action under

Revlon did not begin until . . . the directors began negotiating the sale of Lyondell.”118

Further, we stated that “[t]he duty to seek the best available price applies only when a

company embarks on a transaction—on its own initiative or in response to an unsolicited

offer—that will result in a change of control.”119 Here, with assistance from RBC,

Shackelton, who was then Chairman of both the Special Committee and the Board,

initiated the sale process in December 2010. Given that the Board deemed “any and all

actions heretofore taken by . . . the Special Committee . . . acts and deeds of the

and negotiations with the C & J board, which was majority-independent, and which had the final

say in approving the deal before it went to a stockholder vote[,]” and that, “[a]lthough the board

authorized [the CEO/Chairman] to lead the negotiations” on its behalf, “C & J’s board remained

engaged in the process”) (citations omitted) with Mills Acquisition Co. v. Macmillan, Inc., 559

A.2d 1261, 1281 (Del. 1989) (“Although the Macmillan board was fully aware of its ultimate

responsibility for ensuring the integrity of the auction, the directors wholly delegated the creation

and administration of the auction to an array of [the chairman and CEO’s] hand-picked

investment advisors.”). In Mills, we stated that while a board is entitled to rely upon experts,

officers, and employees selected with reasonable care under 8 Del. C. 141(e), “it may not avoid

its active and direct duty of oversight in a matter as significant as the sale of corporate control.”

Id.

118

Lyondell, 970 A.2d at 242.

119

Id. (citing In re Santa Fe Pac. Corp. S’holder Litig., 669 A.2d 59, 71 (Del. 1995)).

58

Company[,]”120 we confine our holding to these unusual facts and do not view our

affirmance of the trial court’s holding as a departure from our prior case law.121

Third, to sanction RBC’s contention would allow the Board to benefit from a more

deferential standard of review during the time when, due to its lack of oversight, the

Special Committee and RBC engaged in a flawed and conflict-ridden sale process. Given

the parties’ agreement on appeal that Revlon applies, the acceptance by both parties of the

predicate “facts as found,” RBC’s acknowledgement that, as we stated in C & J Energy,

“Revlon requires us to examine whether a board’s overall course of action was

reasonable,”122 we decline to upset the trial court’s legal determination as to when Revlon

was triggered.

We agree with the Court of Chancery’s principal conclusion that the Board’s

overall course of conduct fails Revlon scrutiny. Revlon permits a board to pursue the

transaction it reasonably views as most valuable to the stockholders, provided “the

120

A621.

121

To sanction an argument that Revlon applies only at the very endpoint of the sale process—

and not during the course of the overall sale process—would afford the Board the benefit of a

more lenient standard of review where the sale process went awry, partially due to the Board’s

lack of oversight. Such a result would potentially incentivize a board to avoid active engagement

until the very end of a sale process by delegating the process to a subset of directors, officers,

and/or advisors.

122

C & J Energy Servs., 107 A.3d at 1066. Counsel for RBC argued that Revlon applies when

the “Board gets to the point where it now has all the information it needs for a sale and is

comparing that to remaining independent or some other alternative that it might have. That’s the

point at which the Revlon duties attach. And it is certainly at that point -- it’s not as if the court

ignores what’s gone before that -- because you certainly -- there’s sort of a sliding scale and you

look at what kind of activity there was, in terms of price discovery, before that point and after

that point. And that’s the part that we think the trial court, here, missed. It’s the afterward part

that they need to look at, as well.” Videotape: Oral Argument Before the Delaware Supreme

Court, at 4:50 (RBC Capital Markets, LLC v. Joanna Jervis, No. 140, 2015, September 30,

2015), archived at

http://livestream.com/DelawareSupremeCourt/events/4384267/videos/100717775.

59

transaction is subject to an effective market check under circumstances in which any

bidder interested in paying more has a reasonable opportunity to do so.”123 We stated in

C & J Energy that “[s]uch a market check does not have to involve an active solicitation,

so long as interested bidders have a fair opportunity to present a higher-value alternative,

and the board has the flexibility to eschew the original transaction and accept the higher-

value deal.”124

Here, the evidence fully supports the trial court’s findings that the solicitation

process was structured and timed in a manner that impeded interested bidders from

presenting potentially higher value alternatives. This aspect of the trial court’s ruling

relied, in part, upon findings that RBC designed the sale process to run in parallel with a

process being conducted by EMS, and that “RBC did not disclose that proceeding in

parallel with the EMS process served RBC’s interest in gaining a role on the financing

trees of bidders for EMS.”125 We agree with the trial court’s suggestion that the

reasonableness of initiating a sale process to run in tandem with the EMS auction, absent

conflicts of interest, “would be one of the many debatable choices that fiduciaries and

123

C & J Energy Servs., 107 A.3d at 1067 (citing Equity-Linked Investors, L.P. v. Adams, 705

A.2d 1040 (Del. Ch. 1997); Freedman v. Rest. Assocs. Indus. Inc., 1990 WL 135923 (Del. Ch.

Sept. 19, 1990); Roberts v. Gen. Instrument Corp., 1990 WL 118356 (Del. Ch. Aug. 13, 1990);

In re RJR Nabisco, Inc. S’holders Litig., 14 Del. J. Corp. L. 1132 (Del. Ch. 1989); In Re Fort

Howard Corp. S’holders Litig., 1988 WL 83147 (Del. Ch. Aug. 8, 1988)).

124

Id. at 1067-68 (citing Lyondell, 970 A.2d at 243; In re Dollar Thrifty S’holders Litig., 14 A.3d

573, 612-13, 615 (Del. Ch. 2010); In re MONY Grp. Inc. S’holders Litig., 852 A.2d 9 (Del. Ch.

2004); Equity-Linked Investors, 705 A.2d at 1056-58; Herd v. Major Realty Corp., 1990 WL

212307, at *9 (Del. Ch. Dec. 21, 1990); Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d

278, 289 (Del. Ch. 1989)).

125

Rural I, 88 A.3d at 91.

60

their advisors must make . . . and it would fall within the range of reasonableness.”126

But where undisclosed conflicts of interest exist, such decisions must be viewed more

skeptically.

The record indicates that Rural’s Board was unaware of the implications of the

dual-track structure of the bidding process and that the design was driven by RBC’s

motivation to obtain financing fees in another transaction with Rural’s competitor. There

is ample evidence that there were material barriers, including confidentiality restrictions,

that would have impeded or prevented a bidder from making an offer. For example, the

record supports the trial court’s findings that a bidder for EMS would need a separate

team of advisors to participate in the Rural process, and that these individuals could not

share confidential information with advisors working on a potential EMS acquisition.

RBC also did not explain that a successful bidder for EMS would own a Rural

competitor, making it difficult for the Company to provide due diligence freely to such

bidder. The trial court found that “[t]here is no contemporaneous evidence that [these

problems] were identified and considered.”127 These findings are sufficiently supported

by the record evidence.

The Board, as a result, took no steps to address or mitigate RBC’s conflicts.

Directors frequently rely on expert opinions concerning the fairness of proposed

transactions, and the Delaware General Corporation Law recognizes that directors may

126

Id.

127

Id. at 92.

61

rely upon such expert opinions. In Citron v. Fairchild Camera & Instrument Corp., this

Court observed:

[W]e are, of course, ever mindful of the realities of corporate directorship.

We recognize that management is often the catalyst in the decision-making

process. We further recognize that a board will receive substantial

information from third-party sources. As we have noted on various

occasions, however, in change of control situations, sole reliance on hired

experts and management can “taint[] the design and execution of the

transaction.” Thus, we look particularly for evidence of a board’s active

and direct role in the sale process.128

While a board may be free to consent to certain conflicts, and has the protections

of 8 Del. C. § 141(e), directors need to be active and reasonably informed when

overseeing the sale process, including identifying and responding to actual or potential

conflicts of interest.129 But, at the same time, a board is not required to perform searching

and ongoing due diligence on its retained advisors in order to ensure that the advisors are

not acting in contravention of the company’s interests, thereby undermining the very

process for which they have been retained. A board’s consent to a conflict does not give

the advisor a “free pass” to act in its own self-interest and to the detriment of its client.

Because the conflicted advisor may, alone, possess information relating to a conflict, the

128

Citron v. Fairchild Camera & Instrument Corp., 569 A.2d 53, 66 (Del. 1989) (quoting Mills,

559 A.2d at 1281) (internal citation omitted).

129

“Under 8 Del. C. § 141(e), when corporate directors rely in good faith upon opinions or

reports of officers and other experts ‘selected with reasonable care,’ they necessarily do so on the

presumption that the information provided is both accurate and complete. Normally, decisions

of a board based upon such data will not be disturbed when made in the proper exercise of

business judgment.” Mills, 559 A.2d at 1283-84. A board’s reasonable reliance on an advisor

presupposes that it has undertaken to manage conflicts as part of its oversight of the process. A

board’s consent to the conflicts of its financial advisor necessitates that the directors be

especially diligent in overseeing the conflicted advisor’s role in the sale process.

62

board should require disclosure of, on an ongoing basis, material information that might

impact the board’s process.130

In addition to the problems with the design of the sale process, the trial court

found that Rural’s directors were not adequately informed as to Rural’s value. Further,

the trial court concluded that, when the Special Committee and RBC were selling Rural,

“the Company’s value on a stand-alone basis exceeded what a private equity bidder

willingly would pay.”131 RBC contends that the trial court ignores our recent holding in

C & J Energy, advocating that the post-signing market check cures any shortcomings of

the Rural sale process. The NACD argues that, “this Court has recognized that the

absence of topping bids from the market evidences that a board had adequate information

to evaluate a sale.”132

But RBC ignores other significant aspects of our holding in C & J Energy,

including our recognition that “[t]he ability of the stockholders themselves to freely

accept or reject the board’s preferred course of action is also of great importance in this

context.”133 Here, the stockholders—and the Board—were unaware of RBC’s conflicts

and how they potentially impacted the Warburg offer. Unlike the C & J Energy directors,

the Board failed to appropriately satisfy itself that the Warburg transaction was the best

130

For instance, the board could, when faced with a conflicted advisor, as a contractual matter,

treat the conflicted advisor at arm’s-length, and insist on protections to ensure that conflicts that

might impact the board’s process are disclosed at the outset and throughout the sale process.

131

Rural I, 88 A.3d at 103.

132

NACD Br. 15 (citing Barkan v. Amsted Indus., Inc., 567 A.2d 1279, 1287 (Del. 1989)).

133

C & J Energy Servs., 107 A.3d at 1068 (citing In re El Paso Corp. S’holder Litig., 41 A.3d

432, 449 (Del. Ch. 2012); In re Cogent, Inc. S’holder Litig., 7 A.3d 487, 515 (Del. Ch. 2010); In

re Netsmart Techs., Inc. S’holders Litig., 924 A.2d 171, 208 (Del. Ch. 2007); In re Toys “R” Us,

Inc. S’holder Litig., 877 A.2d 975, 1023 (Del. Ch. 2005)).

63

course of action for its stockholders. Moreover, Rural’s directors were not in a position

to rely on the ability of the Company’s stockholders to have a fair chance to evaluate its

decision, in light of the fact that both the Board and the stockholders were operating on

the basis of an informational vacuum created by RBC.134 Rural’s directors were not

“well-informed” as to Rural’s value, such that the decision to accept Warburg’s offer was

devoid of “important efforts” by the Company’s directors “to protect their stockholders

and to ensure that the transaction was favorable to them.”135

The Court of Chancery determined that, “[a]s a result of th[e] faulty process, the

merger did not generate for stockholders the best value reasonably attainable. . . . RBC’s

faulty design prevented the emergence of the type of competitive dynamic among

multiple bidders that is necessary for reliable price discovery.”136 We agree.

“When a board exercises its judgment in good faith, tests the transaction through a

viable passive market check, and gives its stockholders a fully informed, uncoerced

opportunity to vote to accept the deal,” a court will have difficulty determining that such

board violated its Revlon duties.137 But here, the Company’s stockholders were not fully

informed when they voted to accept the deal. A confluence of factors undercut the

134

See, e.g., id. at 1070 (“Although the C & J board had to satisfy itself that the transaction was

the best course of action for stockholders, the board could also take into account that its

stockholders would have a fair chance to evaluate the board’s decision for themselves.”).

135

Id. at 1069.

136

Rural I, 88 A.3d at 102-03; see also Netsmart, 924 A.2d at 184 (discussing an unreasonably-

conducted, target-initiated active bidding process involving an “informal and haphazard market

canvass” that excluded potential strategic buyers).

137

C & J Energy Servs., 107 A.3d at 1053.

64

reliability and competitiveness of the Rural sale process.138 Moreover, the presence of

Moelis failed to cleanse the defects in the process and the defective financial advice the

Board received from RBC. The Board treated its advice as secondary to that of RBC and,

like RBC, Moelis’s compensation was mostly contingent upon consummation of a

transaction.

Finally, we reject RBC’s contention that the trial court erred by finding a due care

violation without finding gross negligence. RBC argues that intermediate scrutiny under

Revlon exists to determine whether plaintiff stockholders should receive pre-closing

injunctive relief, but it cannot be used to establish a breach of fiduciary duty that warrants

post-closing damages.

When disinterested directors themselves face liability, the law, for policy reasons,

requires that they be deemed to have acted with gross negligence in order to sustain a

monetary judgment against them. That does not mean, however, that if they were subject

to Revlon duties, and their conduct was unreasonable, that there was not a breach of

fiduciary duty.139 The Board violated its situational duty by failing to take reasonable

steps to attain the best value reasonably available to the stockholders. We agree with the

138

Those factors included: (i) “the Company was just beginning to implement new growth

strategies under a new CEO[;]” (ii) for various reasons, “the market did not understand Rural’s

prospects[;]” (iii) large private equity buyers were tied up in the EMS process; and (iv) logical

strategic bidders were focused on their own change of control transactions. Rural I, 88 A.3d at

101-03.

139

See Corwin v. KKR Fin. Holdings LLC, 2015 WL 5772262, at *6 (Del. Oct. 2, 2015)

(“Unocal and Revlon are primarily designed to give stockholders and the Court of Chancery the

tool of injunctive relief to address important M & A decisions in real time, before closing. They

were not tools designed with post-closing money damages claims in mind, the standards they

articulate do not match the gross negligence standard for director due care liability under Van

Gorkom . . . .”). At trial, Jervis was not seeking to impose liability on the defendant directors,

since Jervis had settled the litigation as to them.

65

trial court that the individual defendants breached their fiduciary duties by engaging in

conduct that fell outside the range of reasonableness, and that this was a sufficient

predicate for its finding of aiding and abetting liability against RBC.

B. The Board Violated its Disclosure Obligations

1. Contentions of the Parties

The Court of Chancery concluded that RBC aided and abetted the Board’s breach

of the fiduciary duty of disclosure, due to the fact that the “Proxy Statement contained

false and misleading information about RBC’s incentives,” in addition to “false

information that RBC presented to the Board in its financial presentation.” RBC argues

that the trial court erred in finding that the Proxy Statement was misleading, and in its

finding that the purported misstatements and omissions were material.

2. Standard of Review

Whether disclosures are adequate “is a mixed [question] of law and fact, requiring

an assessment of the inferences a reasonable shareholder would draw and the significance

of those inferences to the individual shareholder.”140 Thus, “this Court has the authority

to review the entire record and to make its own findings of fact in a proper case.”141 But

“if the findings of the trial judge ‘are sufficiently supported by the record and are the

product of an orderly and logical deductive process, . . . we accept them, even though

independently we might have reached opposite conclusions.’”142

140

Shell Petroleum, Inc. v. Smith, 606 A.2d 112, 114 (Del. 1992) (citing Rosenblatt v. Getty Oil

Co., 493 A.2d 929, 944-45 (Del. 1985)) (citations omitted).

141

Id. (quoting Levitt, 287 A.2d at 673) (internal quotation omitted).

142

Id.

66

3. Discussion

RBC lodges three challenges to the trial court’s analysis with respect to the

Disclosure Claim. First, as to the valuation analysis, RBC argues that the Board did not

falsely summarize RBC’s fairness analysis in the Proxy Statement. Further, RBC claims

that the trial court incorrectly scrutinized whether the analysis performed was proper, as

opposed to whether such analysis was accurately described in the Proxy Statement.

Second, RBC contends that the Board and the Company’s stockholders were aware of

RBC’s role in the EMS financing as a result of a February 14, 2011 CD & R press release

identifying RBC among the banks providing the private equity firm with financing in the

EMS transaction.143 RBC also asserts that it negotiated a term in the Engagement Letter

that permitted it to participate in financing the purchase of Rural’s competitors. On this

point, RBC argues that the Proxy Statement described its relationship with Warburg and

disclosed that it was given permission “to indicate that it would be willing to offer buy-

side financing.”144 Such disclosure, according to RBC, was sufficient to inform

stockholders that RBC operated with a potential conflict throughout the sale process.

Finally, RBC contends that the trial court’s finding that the Proxy Statement contained

materially misleading disclosures about the Board’s conclusion as to RBC’s ability to

provide financing to potential purchasers was incorrect.

143

The CD & R press release, dated February 14, 2011, noted that “CD&R has obtained

committed financing from Barclays Capital, Deutsche Bank Securities Inc., BofA Merrill Lynch,

affiliates of Morgan Stanley, RBC Capital Markets and UBS Investment Bank.” A589. The

press release also stated that “Barclays Capital, Deutsche Bank Securities Inc., Morgan Stanley

& Co., RBC Capital Markets and UBS Investment Bank acted as financial advisors” to CD & R

in the EMS transaction. A590.

144

A1091.

67

The Board’s “fiduciary duty of disclosure, like the board’s duties under Revlon

and its progeny, is not an independent dut[y] but the application in a specific context of

the board’s fiduciary duties of care, good faith, and loyalty.”145 In Pfeffer v. Redstone,

we stated that “[c]orporate fiduciaries can breach their duty of disclosure under Delaware

law . . . by making a materially false statement, by omitting a material fact, or by making

a partial disclosure that is materially misleading.”146 We also observed that, “[t]o state a

claim for breach by omission of any duty to disclose, a plaintiff must plead facts

identifying (1) material, (2) reasonably available (3) information that (4) was omitted

from the proxy materials.”147

For an omission to be material, “there must be a substantial likelihood that the

disclosure of the omitted fact would have been viewed by the reasonable investor as

having significantly altered the ‘total mix’ of information made available.”148 Stated

another way, “[o]mitted facts are material ‘if there is a substantial likelihood that a

reasonable stockholder would consider [them] important in deciding how to vote.’”149

Materiality “does not require proof of a substantial likelihood that disclosure of the

omitted fact would have caused the reasonable investor to change his vote[,]”150 only that

145

Malpiede, 780 A.2d at 1086 (citations omitted).

146

Pfeffer v. Redstone, 965 A.2d 676, 684 (Del. 2009) (citations omitted) (internal quotation

omitted).

147

Id. at 686 (citations omitted) (internal quotation omitted).

148

Arnold I, 650 A.2d at 1277 (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449

(1976)) (emphasis removed) (citations omitted). See Rosenblatt, 493 A.2d at 944; Zirn v. VLI

Corp., 621 A.2d 773, 778-79 (Del. 1993).

149

Skeen v. Jo-Ann Stores, Inc., 750 A.2d 1170, 1172 (Del. 2000) (quoting Louden v. Archer-

Daniels-Midland Co., 700 A.2d 135, 142 (Del. 1997)).

150

Rosenblatt, 493 A.2d at 944 (quoting TSC Indus., 426 U.S. at 449).

68

such reasonably available information would have impacted upon a stockholder’s voting

decision. But “[o]mitted facts are not material simply because they might be helpful.”151

i. The Valuation Analysis

The Court of Chancery’s finding that the Proxy Statement incorporated a false

valuation analysis centered on the fact that “RBC told the [Board] that it used ‘Wall

Street research analyst consensus projections’ to derive Rural’s EBITDA for 2010.”152

According to the trial court, “[t]he ‘consensus projections’ were neither analyst

projections, nor did they represent a Wall Street consensus. The figures were actually

Rural’s reported results, not projections, and RBC used the reported figures without

adjusting for one-time expenses, which was contrary to the Wall Street consensus.”153

RBC rests its argument on three points. It contends that the trial court (1) erred in

analyzing whether RBC’s fairness analysis was flawed rather than whether the Proxy

Statement fairly and accurately described that analysis; (2) erred in concluding that the

underlying fairness analysis was false; and (3) erred in determining that the Adjusted

EBITDA figure used in conducting the precedent transaction analysis was material. We

disagree with these contentions.

The trial court concluded that the Proxy Statement did not accurately represent

RBC’s analysis. It found that RBC employed an Adjusted EBITDA figure of $69.8

million when conducting its precedent transaction analysis, while the Proxy Statement’s

disclosures with respect to Rural’s 2010 Adjusted EBITDA referenced the $76.8 million

151

Skeen, 750 A.2d at 1174.

152

Rural I, 88 A.3d at 104.

153

Id.

69

figure. Moreover, the Proxy Statement stated that RBC adjusted the guideline target

companies’ EBITDA in its precedent transaction analysis “to account for . . . certain one-

time expenses . . . .”154 The trial court also found that the Proxy Statement falsely

suggested that RBC performed its analysis in accordance with Wall Street analyst

“consensus.” Accordingly, the trial court determined that a stockholder reviewing the

Proxy Statement would incorrectly conclude that RBC used the disclosed Adjusted

EBITDA that added back one-time expenses.

Here, the trial court’s decision was both supported by the record and well-

reasoned. There is a substantial likelihood that a reasonable stockholder would consider

the Adjusted EBITDA figure used in conducting the precedent transaction analysis to be

material when considering how to vote. Both ISS and Glass Lewis interpreted $8.19 per

share—the low end of the “consensus” range at 6.3x—as the true low end of RBC’s

precedent transaction analysis. We agree with the trial court’s conclusion that the

“consensus” range was artificial and misleading, and that the information that RBC

provided for the Proxy Statement about its precedent transaction analysis was material

and false.

ii. RBC’s Failure to Fully Disclose its Conflicts

RBC contends that its last minute efforts seeking to provide staple financing to

Warburg were “not material.” RBC further urges that stockholders reading the Proxy

Statement knew that RBC operated with a potential conflict and that disclosure of that

154

A1100.

70

potential conflict was sufficient.155 The Court of Chancery concluded that the “Proxy

Statement contained false and misleading information about RBC’s incentives.”156 In so

doing, it reiterated that “it is imperative for the stockholders to be able to understand what

factors might influence the financial advisor’s analytical efforts. . . .”157 We agree.

The Proxy Statement stated that RBC received the right to offer staple financing

because it “could provide a source for financing on terms that might not otherwise be

available to potential buyers of the Company . . . .”158 The trial court determined that this

statement was “false,” given that the Board “never concluded that RBC could provide

financing that might otherwise not be available, and no evidence to that effect was

introduced at trial.”159 This finding is supported by the record.

The Proxy Statement’s discussion of RBC’s right to offer staple financing was a

partial disclosure. When parties to a transaction and their advisors “travel[] down the

road of partial disclosure . . . they . . . [have] an obligation to provide the stockholders

155

Similarly, the NACD contends that, “[i]t should be enough to disclose RBC had permission to

seek to offer buy-side financing, as Rural did here.” NACD Br. 17 (emphasis added). We

disagree.

156

Rural I, 88 A.3d at 105.

157

Id. (quoting David P. Simonetti Rollover IRA v. Margolis, 2008 WL 5048692, at *8 (Del. Ch.

June 27, 2008)). See also In re Lear Corp. S’holder Litig., 926 A.2d 94, 114 (Del. Ch. 2007)

(requiring disclosure of a CEO conflict of interest, where the CEO acted as negotiator and

observing that, “a reasonable stockholder would want to know an important economic

motivation of the negotiator singularly employed by a board to obtain the best price for the

stockholders, when that motivation could rationally lead that negotiator to favor a deal at a less

than optimal price, because the procession of a deal was more important to him, given his overall

economic interest, than only doing a deal at the right price”).

158

A1090.

159

Rural I, 88 A.3d at 106.

71

with an accurate, full, and fair characterization of those historic events.”160 The Proxy

Statement failed to disclose how RBC used the Rural sale process to seek a financing role

in the EMS transaction. Nor did it disclose RBC’s courtship of Warburg. When viewed

in conjunction with the potential fees RBC was to receive for its financing services, the

investment bank’s pursuit of Warburg’s financing business was demonstrative of a

conflict that was unquestionably material, and necessitated full and fair disclosure for the

benefit of the stockholders.

C. RBC Aided and Abetted the Board’s Breaches

1. Contentions of the Parties

RBC advances three arguments to support its claim that the Court of Chancery

erred in determining that the investment bank aided and abetted the Board’s breach of the

duty of care. First, RBC argues that a third party cannot “knowingly participate” in an

exculpated breach of the duty of care, and it contends that a third party cannot knowingly

participate in a breach of the duty of care that is not “inherently wrongful.” Second, RBC

suggests that the Court of Chancery erred by concluding that “a third party” can be

deemed to have knowingly participated in a breach of the duty of care when it “misleads

directors into breaching their” fiduciary obligation. Finally, RBC asserts that aiding and

abetting is a “subset of conspiracy” and therefore rests on proof that the aider and abettor

agreed to a joint course of conduct with the primary actor.

2. Standard of Review

160

Zirn v. VLI Corp., 681 A.2d 1050, 1056 (Del. 1996) (quoting Arnold I, 650 A.2d at 1280)

(citation omitted) [hereinafter, “Zirn II, 681 A.2d at __”].

72

This Court reviews the Court of Chancery’s conclusions of law de novo.161

However, we afford a trial court’s factual findings a “high level” of deference,162 and we

will not disturb such conclusions unless they are the by-product of clear error.163

3. Discussion

In Malpiede v. Townson, this Court described the elements of aiding and abetting

breaches of fiduciary duty as: (i) the existence of a fiduciary relationship, (ii) a breach of

the fiduciary’s duty, (iii) knowing participation in that breach by the defendants, and (iv)

damages proximately caused by the breach.164 The first two elements are established as

set forth above.

As to the third element, this Court, in Malpiede, observed that “[a] third party may

be liable for aiding and abetting a breach of a corporate fiduciary’s duty to the

stockholders if the third party ‘knowingly participates’ in the breach.”165 We stated

further that “[k]nowing participation in a board’s fiduciary breach requires that the third

party act with the knowledge that the conduct advocated or assisted constitutes such a

161

Unitrin, 651 A.2d at 1385.

162

United Techs., 109 A.3d at 557 (quoting DV Realty Advisors, 75 A.3d at 108).

163

DV Realty Advisors, 75 A.3d at 109.

164

Malpiede, 780 A.2d at 1096 (quoting Penn Mart Realty Co. v. Becker, 298 A.2d 349, 351

(Del. Ch. 1972)). See also Weinberger v. Rio Grande Indus., Inc., 519 A.2d 116, 131 (Del. Ch.

1986); Gilbert v. El Paso Co., 490 A.2d 1050, 1057 (Del. Ch. 1984). In Malpiede, we

“express[ed] no view on the question whether a third party may ‘knowingly participate’ in or

give substantial assistance to a board’s grossly negligent conduct or whether a third party may be

liable for aiding and abetting only if the board’s breach is intentional.” Malpiede, 780 A.2d at

1097 n.78 (citations omitted).

165

Malpiede, 780 A.2d at 1096 (quoting Gilbert, 490 A.2d at 1057) (citations omitted). See also

Mills, 559 A.2d at 1284 n.33 (noting that “it is bedrock law that the conduct of one who

knowingly joins with a fiduciary, including corporate officials, in a breach of a fiduciary

obligation, is equally culpable”).

73

breach.”166 As an example, this Court has said that “a bidder may be liable to the target’s

stockholders if the bidder attempts to create or exploit conflicts of interest in the

board.”167 The trial court, in a lengthy analysis of aiding and abetting law and tort law,

held that if a “[i]f the third party knows that the board is breaching its duty of care and

participates in the breach by misleading the board or creating the informational vacuum,

then the third party can be liable for aiding and abetting.”168 We affirm this narrow

holding.

It is the aider and abettor that must act with scienter. The aider and abettor must

act “knowingly, intentionally, or with reckless indifference . . .[;]”169 that is, with an

“illicit state of mind.”170 To establish scienter, the plaintiff must demonstrate that the

aider and abettor had “actual or constructive knowledge that their conduct was legally

166

Malpiede, 780 A.2d at 1097 (citations omitted).

167

Id. (citing Gilbert, 490 A.2d at 1058 (“[A]lthough an offeror may attempt to obtain the lowest

possible price for stock through arm’s-length negotiations with the target’s board, it may not

knowingly participate in the target board’s breach of fiduciary duty by extracting terms which

require the opposite party to prefer its interests at the expense of its shareholders.”)) (citations

omitted).

168

Rural I, 88 A.3d at 97.

169

Metro Commc’n Corp. BVI v. Advanced Mobilecomm Techs. Inc., 854 A.2d 121, 143 (Del.

Ch. 2004) (quoting DRR, L.L.C. v. Sears, Roebuck & Co., 949 F. Supp. 1132, 1137 (D. Del.

1996)). See Lord v. Souder, 748 A.2d 393, 402 (Del. 2000) (“It is well-settled under both

Delaware law and the law of most other jurisdictions that the scienter . . . requirement can be

satisfied by a showing of recklessness. . . . ‘There is of course no difficulty in finding the

required intent to mislead where it appears that the speaker believes his statement to be false.

Likewise there is general agreement that it is present when the representation is made without

belief as to its truth, or with reckless disregard whether it be true or false.’”) (internal citation

omitted).

170

In re Oracle Corp., 867 A.2d 904, 931 (Del. Ch. 2004).

74

improper.”171 Accordingly, the question of whether a defendant acted with scienter is a

factual determination.172 The trial court found that, “[o]n the facts of this case, RBC

acted with the necessary degree of scienter and can be held liable for aiding and

abetting.”173 The evidence supports this finding.

RBC knowingly induced the breach by exploiting its own conflicted interests to

the detriment of Rural and by creating an informational vacuum.174 RBC’s knowing

participation included its failure to disclose its interest in obtaining a financing role in the

EMS transaction and how it planned to use its engagement as Rural’s advisor to capture

buy-side financing work from bidders for EMS; its knowledge that the Board and Special

Committee were uninformed about Rural’s value; and its failure to disclose to the Board

its interest in providing the winning bidder in the Rural process with buy-side financing

and its eleventh-hour attempts to secure that role while simultaneously leading the

negotiations on price. RBC’s desire for Warburg’s business also manifested itself in its

financial analysis, provided by RBC the day the Board approved the merger. RBC’s

illicit manipulation of the Board’s deliberative processes for self-interested purposes was

enabled, in part, by the Board’s own lack of oversight, affording RBC “the opportunity to

171

Wood v. Baum, 953 A.2d 136, 141 (Del. 2008) (citing Malpiede, 780 A.2d 1075); Emerald

Partners v. Berlin, 787 A.2d 85 (Del. 2001) [hereinafter, “Emerald Partners III, 787 A.2d at

__”]) (citation omitted).

172

Merck & Co., Inc. v. Reynolds, 559 U.S. 633, 648 (2010) (stating that “[s]cienter is assuredly

a ‘fact’” (emphasis added)).

173

Rural I, 88 A.3d at 97.

174

Cf. Encite LLC v. Soni, 2011 WL 5920896, at *26 (Del. Ch. Nov. 28, 2011) (recognizing that

a “plaintiff can prove knowing participation by showing that a [third party] ‘attempt[ed] to create

or exploit conflicts of interest in the board’ or ‘conspire[d] in or agree[d] to the fiduciary

breach’”) (citation omitted).

75

indulge in the misconduct which occurred.”175 The Board was unaware of RBC’s

modifications to the valuation analysis, back-channel communications with Warburg, and

eleventh-hour attempt to capture at least a portion of the acquirer’s buy-side financing

business. RBC made no effort to advise the Rural directors about these contextually

shaping points. The result was a poorly-timed sale at a price that was not the product of

appropriate efforts to obtain the best value reasonably available and, as the trial court

found, a failure to recognize that Rural’s stand-alone value exceeded the sale price.

RBC’s failure to fully disclose its conflicts and ulterior motives to the Board, in

turn, led to a lack of disclosure in the Proxy Statement.176 The Proxy Statement included

materially misleading information that RBC presented to the Board in its financial

presentation and omitted information about RBC’s conflicts.

The manifest intentionality of RBC’s conduct—as evidenced by the bankers’ own

internal communications—is demonstrative of the advisor’s knowledge of the reality that

the Board was proceeding on the basis of fragmentary and misleading information.

Propelled by its own improper motives, RBC misled the Rural directors into breaching

their duty of care, thereby aiding and abetting the Board’s breach of its fiduciary

obligations.177

175

Mills, 559 A.2d at 1279.

176

See, e.g., Goodwin v. Live Entm’t, Inc., 1999 WL 64265, at *28 n.22 (Del. Ch. Jan. 25, 1999)

(discussing disclosure of improper motives).

177

SIFMA claims that it is internally inconsistent that a “victimized” board engaged in

wrongdoing. But the trial court held that the Board independently breached its duty of care in

ways not caused by RBC. One such example was the Board’s failure to exercise appropriate

oversight as to the unauthorized initiation of the sale process. Certain other breaches were more

directly the result of RBC’s conduct. See, e.g., Rural II, 102 A.3d at 239 (“The directors

76

D. Proximate Cause

1. Contentions of the Parties

RBC contends that the court below improperly concluded that but for the financial

advisor’s actions the Board would not have breached its duty of care “and damaged

Rural’s stockholders by causing the Company to be sold at a price below its fair

value.”178 RBC suggests that “Moelis’s presence in [the Warburg] negotiations logically

cuts the causal link relied upon by the trial court.”179 RBC similarly rests on the

availability of Moelis’s financial analysis to support its argument that the Court of

Chancery erred in determining that RBC proximately caused the harm suffered by the

Company’s stockholders when voting in favor of the Warburg offer on the basis of the

misleading and false Proxy Statement.180

2. Standard of Review

On appeal, this Court reviews the issue of proximate cause for clear error, as the

question “is ordinarily a question of fact to be determined by the trier of fact.”181

3. Discussion

Under Delaware law, a proximate cause is one “which in natural and continuous

sequence, unbroken by any efficient intervening cause, produces the injury and without

breached their duties when approving the disclosures in the Proxy Statement and when

approving the Merger, but they did so because RBC misled them, affirmatively in the case of the

Disclosure Claim and both affirmatively and by omission during the final approval of the

Merger.”).

178

Rural I, 88 A.3d at 101.

179

Op. Br. 52.

180

Id. at 54.

181

Duphily v. Del. Elec. Co-op., Inc., 662 A.2d 821, 830 (Del. 1995) (citations omitted).

77

which the result would not have occurred.”182 Our law “has long recognized that there

may be more than one proximate cause of an injury.”183 To establish proximate cause, “a

plaintiff must show that the result would not have occurred ‘but for’ the defendant’s

action.”184 Further, “[i]n order to break the causal chain, the intervening cause must also

be a superseding cause, that is, the intervening act or event itself must have been neither

anticipated nor reasonably foreseeable by the original tortfeasor.”185 “[A] superseding

cause is a new and independent act, itself a proximate cause of an injury, which breaks

the causal connection between the original tortious conduct and the injury.”186 However,

“[t]he mere occurrence of an intervening cause . . . does not automatically break the chain

of causation stemming from the original tortious conduct.”187

The Board’s receipt of Moelis’s financial analysis—which the Special Committee

treated as “secondary” to that of RBC—does not remedy RBC’s improper conduct, nor

does it destroy the causal link between RBC’s actions, the Board’s failure to satisfy itself

of its fiduciary obligations, and the harm suffered by the Company’s stockholders.188

182

Russell v. K-Mart Corp., 761 A.2d 1, 5 (Del. 2000) (quoting Duphily, 662 A.2d at 829)

(internal quotations omitted).

183

Jones v. Crawford, 1 A.3d 299, 302 (Del. 2010) (quoting Culver v. Bennett, 588 A.2d 1094,

1097 (Del. 1991)) (internal quotation omitted).

184

Mazda Motor Corp. v. Lindahl, 706 A.2d 526, 532 (Del. 1998) (citing Money v. Manville

Corp. Asbestos Disease Comp. Trust Fund, 596 A.2d 1372, 1375-77 (Del. 1991); Culver, 588

A.2d at 1097).

185

Duphily, 662 A.2d at 829 (citing Stucker v. Am. Stores Corp., 171 A. 230, 233 (Del. 1934)).

186

Id.

187

Id.

188

We acknowledge that obtaining the advice of a second bank is a common practice and that

such practice can have a salutary effect on a sale process. But see In re BankAtlantic Bancorp,

Inc. Litig., 39 A.3d 824, 840 (Del. Ch. 2012) (enjoining a sale transaction, despite the presence

of two financial fairness opinions from two separate banks); El Paso, 41 A.3d at 434 (discussing

the problematic entwinement of primary and secondary bank incentives); In re Del Monte Foods

78

Moelis was a secondary actor in the valuation process, and—like RBC—was

compensated for its advisory role on contingent basis. RBC’s argument that Moelis’s

presence cleansed the process falls short, in part, because the supposedly conflict-

cleansing bank was paid on the same contingent basis as the primary bank. A contingent

compensation arrangement that pays an advisor a percentage of the deal value can have

the salutary effect of aligning the interests of the advisor with those of its client in

attempting to obtain the best value. But there could be misalignment over whether to

take a deal in the first instance, and divergence could arise over how to proceed during

final negotiations.189 Moelis’s fairness opinion does not cure RBC’s aiding and abetting

of the Board’s breach of the duty of disclosure. Here, the stockholders went to the ballot

box on the basis of a deficient Proxy Statement, the insufficiency and misleading nature

of which was due to RBC’s failure to be forthcoming.

SIFMA submits that a claim for aiding and abetting a breach of the duty of care, if

recognized by this Court, would create an anomalous imbalance of responsibilities where

a non-fiduciary may be held liable for an unintentional violation of a fiduciary duty by a

fiduci

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